Will shares in Marks & Spencer help you build a FTSE-beating retirement fund?
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 any time soon, either, as the eurozone and the UK 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 (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 Marks & Spencer Group (LSE: MKS), the high-street bellwether whose clothing sales are coming under increasing pressure from the likes of Next (LSE: NXT).
Fashion and food
Marks & Spencer's mixture of food and clothing has served it well over the years, but there's no doubt that it's struggling in the fashion department at the moment, something that has been reflected in its financial results over the last few years, as it has failed to outperform the FTSE 100:
| Total return | 2007 | 2008 | 2009 | 2010 | 2011 | Trailing 10-yr avg. |
|---|
| Marks & Spencer | -19.1% | -57.6% | 94.2% | -4.3% | -11.1% | 3.9% |
| FTSE 100 | 7.4% | -28.3% | 27.3% | 12.6% | -2.2% | 6.8% |
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.)
M&S has recently appointed a new style director and replaced the director responsible for the company's clothing ranges. But will it be enough to lift the company's total returns above 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 Marks & Spencer shapes up:
| Item | Value |
|---|
| Year founded | 1894 |
| Market cap | £5.7bn |
| Net debt | £2.1bn |
| Dividend Yield | 4.8% |
Five-year average financials |
| Operating margin | 9.7% |
| Interest cover | 6.8x |
| EPS growth | -1.0% |
| Dividend growth | 4.4% |
| Dividend cover | 2.1x |
Source: Morningstar, Digital Look, Marks & Spencer
Here's how I've scored Marks & Spencer on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | Another British name with more than 100 years of trading. | 5/5 |
| Performance vs. FTSE | Not great and not consistent. | 3/5 |
| Financial strength | Margins are always under pressure but interest cover is strong. | 3/5 |
| EPS growth | Needs to do better -- its products are the problem. | 2/5 |
| Dividend growth | A decent yield means that matching inflation is acceptable. | 4/5 |
Total: 17/25 |
Marks & Spencer has a serious job ahead of it to regain the initiative in the high-street fashion stakes. Its score of 17/25 highlights the potential of this stock, but it hasn't delivered properly for some years -- and clothing sales were down more than 5% in the first quarter of the current financial year.
Expert selections
Marks & Spencer won't be on my retirement portfolio shopping list, but I do already own some of the great dividend-paying shares picked by City fund manager Neil Woodford, who manages £20bn of private investors' money in his funds.
Neil Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years and his independent, analytical approach to investing led him to sell out of banking shares before they collapsed and completely avoid the dotcom crash at the turn of the century. In short, Mr Woodford is a man whose investing opinions are worth listening to.
You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr 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:
> Roland does not own shares in Marks & Spencer or Next.
