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 Petrofac
Petrofac vs. FTSE 100
Let's start with a look at how Petrofac has performed against the FTSE 100 over the last five years. Although the company was founded 31 years ago, it only floated on the LSE in 2005, so 10-year figures aren't yet available:
|
Total Returns |
2007 |
2008 |
2009 |
2010 |
2011 |
5-year trailing avg. |
|---|---|---|---|---|---|---|
| Petrofac |
38.0 |
(35.4) |
203.3 |
57.0 |
(7.4) |
27.9% |
| FTSE 100 |
7.4 |
(28.3) |
27.3 |
12.6 |
(2.2) |
2.6% |
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.
Petrofac's growth since its listing on the London Stock Exchange has been outstanding. The trend has continued this year -- to date, Petrofac has delivered a total return of 13.9%, squarely outperforming the FTSE 100's total return of 7.3%. So is Petrofac a potential retirement share?
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 Petrofac shapes up:
|
Item |
Value |
|---|---|
| Year founded |
1981 |
| Market cap |
£5.3bn |
| Net debt (cash) |
(£956m) |
| Dividend Yield |
2.3% |
|
5-year-average financials |
|
| Operating margin |
11.4% |
| Interest cover |
114x |
| EPS growth |
50.7% |
| Dividend growth |
50% |
| Dividend cover |
3.0x |
Source: Morningstar, Digital Look, Petrofac
Here's how I've scored Petrofac on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
| Longevity | Young, but maturing rapidly. |
3/5 |
| Performance vs. FTSE | One of the best in recent years. |
4/5 |
| Financial strength | Strongly cash generative with stable margins. |
5/5 |
| EPS growth | Very strong earnings growth. |
5/5 |
| Dividend growth | Strong dividend growth and decent yield for a growth share. |
4/5 |
|
Total: 21/25 |
In the original American gold mining boom, the surest way to get rich was to sell picks and shovels to the speculators. That remains true today and Petrofac has prospered by selling its oilfield services to an increasingly adventurous global oil and gas industry. So can it continue?
Petrofac's score of 21/25 suggests it could be a decent retirement share, and with a few reservations, I agree. Petrofac has proved itself able to generate steady profits and lots of cash from its role as an oilfield services provider. Although its onshore engineering order book has flatlined in the second-half of this year, the group's overall order book is worth $9.4 billion and looks strong. If $90 oil really is the new normal, then Petrofac should continue to prosper and could deliver an increasingly attractive dividend, giving it serious potential as a retirement share.
The biggest risk to the business would be a prolonged and major drop in oil prices, which would mean that many of its customers would be forced to scale back their activities. I think this is unlikely, but it isn't impossible.
Petrofac currently trades at a substantial discount to its U.K. peer, John Wood Group, and offers strong growth potential. Despite this, if you are planning a diversified retirement portfolio, you should remember that Petrofac's profits are closely related to oil prices. If you already own shares in a major oil producer like BP, adding Petrofac could make you overweight in the oil sector.
Top income picks
If Petrofac is a bit too risky for your retirement portfolio, then you might want to take a look at the top income picks 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 326% in the 15 years to June 2012.
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.
