LONDON -- 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 UK large-caps that have the potential to beat the FTSE 100 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 Kingfisher (KGF -0.48%), the company that owns B&Q and Screwfix, plus the French DIY chains Castorama and Brico Depot.
DIY success?
To start with, let's take a look at how Kingfisher has performed against the FTSE 100 over the last 10 years:
|
Total Return |
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing-10-Yr. Avg. |
|---|---|---|---|---|---|---|
|
Kingfisher |
(34.5%) |
(3.6%) |
73.6% |
17.4% |
(1.9%) |
4.1% |
|
FTSE 100 |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
8.2% |
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.)
Things don't get off to a good start, as Kingfisher's trailing-10-year average total return is half that of the FTSE 100, suggesting that you'd have been better off putting your money into an index tracker. However, the company's present dip in form might provide a good buying opportunity -- so let's look at it a little more deeply.
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 Kingfisher shapes up:
|
Year founded |
1982 |
|
Market cap |
6.3 billion pounds |
|
Net debt |
155 million pounds |
|
Dividend Yield |
3.3% |
|
Operating margin |
5.6% |
|
Interest cover |
12.7 times |
|
EPS growth |
18.5% |
|
Dividend growth |
(0.3%) |
|
Dividend cover |
2.9 times |
Sources: Morningstar, Digital Look, Kingfisher.
Here's how I've scored Kingfisher on each of these criteria:
|
Longevity |
Thirty years is not much, but DIY looks like a good long-term prospect. |
3/5 |
|
Performance vs. FTSE |
Not bad, but not amazing. |
3/5 |
|
Financial strength |
Low debt, rising margins and generous dividend cover. |
4/5 |
|
EPS growth |
Recent years have seen strong growth, but this year's wet weather hit sales hard. |
4/5 |
|
Dividend growth |
Dividends were cut in 2007/8 and have grown since then, but remain below 2006/7 levels. |
3/5 |
|
Total: 17/25 |
||
Despite B&Q's poor fortunes this summer -- thanks to record wet weather -- it's hard to imagine that the market for DIY materials will ever seriously subside. B&Q's dominance may be relatively new, but the need for its products isn't, and in countries such as the U.K., where home ownership is a national obsession and much of our housing stock is old and in need of regular maintenance, this seems unlikely to change. What's more, Kingfisher also has a healthy presence in the trade market, providing counter and delivery services to small businesses, via its B&Q Trade and Screwfix brands.
A score of 17/25 is reasonable and suggests that it might be worth considering Kingfisher alongside other retail shares when building a retirement fund portfolio. Despite this, I won't be adding it to mine, as I prefer to invest in the more essential retail services provided by supermarkets -- in particular Tesco and Sainsbury -- where although customers might cut back on luxuries, core purchases are less easily postponed or avoided.
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.
The good news is that 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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Further investment opportunities:
