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 things will improve 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 to protect yourself from the downturn, however, is to build 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 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 Johnson Matthey
Cleaning up
Johnson Matthey has performed strongly against the FTSE 100 over the last 10 years, as these figures show:
|
Total Return |
2007 |
2008 |
2009 |
2010 |
2011 |
10-Year Trailing Average |
|---|---|---|---|---|---|---|
|
Johnson Matthey |
35.9% |
(39.8%) |
43.2% |
35.8% |
(7.5) |
11.8% |
|
FTSE 100 |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2) |
7.4% |
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.
Johnson Matthey's 10-year average trailing total return is impressive and places its total returns firmly ahead of those of the FTSE 100.
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 Johnson Matthey shapes up:
The basics
|
Year Founded |
1817 |
|
Market Cap |
4.6 billion pounds |
|
Net Debt |
483 million pounds |
|
Dividend Yield |
2.4% |
Five-year average financials
|
Operating Margin |
3.7% |
|
Interest Cover |
9.7 times |
|
EPS Growth |
15.9% |
|
Dividend Growth |
10.7% |
|
Dividend Cover |
2.6 times |
Source: Morningstar, Digital Look, Johnson Matthey.
Here's how I've scored Johnson Matthey on each of these criteria:
|
Criterion |
Comment |
Score (out of 5) |
|---|---|---|
|
Longevity |
Almost 200 years is pretty impressive. |
5 |
|
Performance vs. FTSE |
It has beaten the index over the last decade. |
4 |
|
Financial strength |
Modest debt, stable margins, and ample interest cover. |
4 |
|
EPS growth |
Decent growth in recent years. |
4 |
|
Dividend growth |
Strong growth rate, albeit below-average yield. |
4 |
|
|
Total: 21/25 |
Although Johnson Matthey's current dividend yield of 2.4% is below the FTSE 100 average, dividend growth is one of the most important attributes for long-term retirement investing, as you need your income to keep pace with inflation. Johnson Matthey scores very well in this regard, as its annual dividend payments have risen from 19 pence in 1999 to 46 pence in 2011 -- an increase of 242% in 12 years. What's more, the dividend rose every single year during that period.
Anyone who invested in Johnson Matthey at the end of 1999 would have paid around 700 pence per share and received an initial dividend yield of around 2.7%. Today, that original investment would provide a dividend yield on cost of 6.5% -- better than the vast majority of FTSE 100 shares and highlighting the value of dividend growth and long-term holding in retirement investing. By taking this approach, you would not have had to worry about the capital value of your shares falling by 57% in 2008; your income would have continued to rise regardless, and sure enough, the share price has also since recovered.
I think Johnson Matthey's score of 21 is well-deserved and suggests that it could be a strong candidate for a retirement fund portfolio, especially if your retirement is still at least five or 10 years away.
Top income picks
Doing your own research is important, but another good way to identify 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, whose income stock picks outperformed the wider index by a staggering 305% in the 15 years to the end of 2011. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. 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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