Will shares in G4S 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 G4S (LSE: GFS), the security outsourcing giant that is currently in the headlines over its failure to provide enough security guards for the Olympics. Is this a rare lapse from a well-run company, or is there trouble brewing?
The FTSE's biggest employer
G4S is the biggest employer on the London Stock Exchange, with more than 650,000 employees -- making its Olympic problems all the more surprising. It has outperformed the FTSE 100 on a total returns basis for four of the last five years, suggesting a history of strong earnings growth:
| Total Return | 2007 | 2008 | 2009 | 2010 | 2011 | Trailing 5 yr avg. |
|---|
| G4S | 32.7% | -13.6% | 30.4% | 0.6% | 10.0% | 4.7% |
| FTSE 100 | 7.4% | -28.3% | 27.3% | 12.6% | -2.2% | 0.4% |
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.)
I normally look at the company's trailing 10-year average and compare it to the FTSE 100, but G4S has only existed in its present form since 2004, so I've had to use the five-year figure, which shows that in recent years, G4S has outperformed the Footsie.
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 G4S shapes up:
| Item | Value |
|---|
| Year founded | 2004* |
| Market cap | £3.4bn |
| Net debt | £1.8bn |
| Dividend Yield | 3.6% |
5 year average financials |
| Operating margin | 5.5% |
| Interest cover | 3.7x |
| EPS growth | 8.2% |
| Dividend growth | 15.9% |
| Dividend cover | 2.2x |
Source: Morningstar, Digital Look
*G4S was formed when Group 4 Falck merged with Securicor in July 2004.
Here's how I've scored G4S on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | A 77-year history of corporate evolution, but only eight in its current form. | 3/5 |
| Performance vs. FTSE | G4S has generally outperformed the FTSE 100 since its 2004 listing, but that's a relatively short period to judge by. | 3/5 |
| Financial strength | G4S has low margins and quite high debt, reflecting tough competition and high costs. | 2/5 |
| EPS growth | Earnings growth has been strong but may be beginning to slow. | 3/5 |
| Dividend growth | G4S has increased its dividend every year since it listed on the LSE and its annual average increase is well above inflation. | 4/5 |
Total: 15/25 |
A score of 15/25 is pretty average and suggests that while G4S could be a candidate for a retirement fund portfolio, it does have some weaknesses, which brings me to my next tip.
Expert selections
One way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful 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 stock picks have outperformed the wider index by a staggering 305% over the last 15 years.
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 G4S.
