The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at National Grid
High voltage returns?
Here's how National Grid's investors have fared against the FTSE 100 over the last 10 years:
|
Total Return |
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing-10-year avg. |
|---|---|---|---|---|---|---|
| National Grid |
17.2% |
(13.9%) |
4.6% |
(13.0%) |
19.8% |
6.4% |
| FTSE 100 |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
7.7% |
Source: Morningstar. (Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
National Grid's performance against the FTSE 100 has been pretty respectable, and it is not far off matching the FTSE 100 on its trailing-10-year average total return.
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how National Grid shapes up:
|
Item |
Value |
|---|---|
| Year founded |
1990 |
| Market cap |
£24.9bn |
| Net debt |
£22.7bn |
| Dividend Yield |
5.8% |
|
5-year-average financials |
|
| Operating margin |
24.9% |
| Interest cover |
3.1x |
| EPS growth |
9% (adj.) |
| Dividend growth |
9.7% |
| Dividend cover |
1.7x |
Source: Morningstar, Digital Look, National Grid
Here's how I've scored National Grid on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
| Longevity | A young company, but of course its assets are much older. |
3/5 |
| Performance vs. FTSE | Underperforms on price but over performs on yield. |
4/5 |
| Financial strength | By utility standards, it's solid high debt is the norm. |
3/5 |
| EPS growth | Operating in the U.S. and U.K. helps diversify earnings growth. |
4/5 |
| Dividend growth | Very good indeed -- well above inflation plus a high yield. |
5/5 |
|
Total: 19/25 |
A score of 19/25 is pretty decent and highlights National Grid's appeal as a retirement portfolio share. Like most utilities, National Grid's business requires vast amounts of capital investment and the company is currently in the process of negotiating its pricing and investment obligations for the years 2013-2021 with its U.K. regulator, Ofgem. To provide an idea of the scale of these commitments, the initial proposals would require National Grid to spend around £15 billion on upgrading Britain's gas and electricity transmission networks.
The exact outcome of the proposals is yet to be confirmed and the pricing controls will dictate how much profit National Grid will be allowed to make over the next decade. An unexpected outcome could unsettle the company's share price for a short period, but it is worth remembering that it will only affect the U.K. side of the business -- close to half of National Grid's income now comes from its U.S. business. In the U.S., National Grid operates a number of regional gas and electricity networks, a business it has been expanding since 2000, when it acquired U.S. utility Niagara Mohawk.
Overall, I believe that National Grid is an excellent retirement share. Its business is stable and profitable and its long history of inflation beating dividend growth means that it should continue to provide a reliable income. While capital gains may be more limited, I don't think this is important for a retirement share, whose main purpose is to provide income, with as little trading as possible.
Expert selections
Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to Dec. 31, 2011.
You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.
This report is completely free and I strongly recommend you download "8 Shares Held by Britain's Super Investor" today, as it is available for a limited time only.
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