Will shares in Morrisons 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 anytime 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 Morrison (Wm) Supermarkets (LSE: MRW), the UK's fourth-largest supermarket chain.
Morrisons vs. FTSE 100
Let's take a look at how Morrisons has performed against the FTSE 100 over the last 10 years:
| Total Return | 2007 | 2008 | 2009 | 2010 | 2011 | Trailing 10 yr avg. |
|---|
| Morrisons | 28.1% | -11.4% | 1.2% | -0.5% | 26.2% | 5.6% |
| FTSE 100 | 7.4% | -28.3% | 27.3% | 12.6% | -2.2% | 7.3% |
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.)
Morrisons' trailing 10-year average total return lags behind that of the FTSE 100 but its safe, defensive qualities -- people don't stop going to the supermarket in a recession -- bode well for its long-term prospects.
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 Morrisons shapes up:
| Item | Value |
|---|
| Year founded | 1899 |
| Market cap | £7bn |
| Net debt | £1.5bn |
| Dividend Yield | 3.8% |
| 5 year average financials |
|---|
| Operating margin | 5.1% |
| Interest cover | 16.8x |
| EPS growth | 30% |
| Dividend growth | 26.4% |
| Dividend cover | 3.3x |
Source: Morningstar, Digital Look, Morrisons
Here's how I've scored Morrisons on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | A long trading history, albeit only 11 years in the FTSE 100. | 4/5 |
| Performance vs. FTSE | Respectable but not outstanding. | 3/5 |
| Financial strength | Stable margins and high interest cover without excessive debt. | 4/5 |
| EPS growth | My average was skewed by one amazing year -- since 2008, average EPS growth has been just 7.3%. | 3/5 |
| Dividend growth | Very impressive in recent years, cover remains ample. | 4/5 |
| Total: 18/25 |
A very respectable score of 18/25 sums up Morrisons; a sound, well-run business with a solid future. Investors in Morrisons should fare well over the coming years, although I do have some slight concerns over the sustainability of Morrisons' position as the smallest of four mainstream supermarkets. Morrisons is neither one of the big three -- Asda, Tesco (LSE: TSCO) and Sainsbury (LSE: SBRY) -- nor a discounter, like Aldi and Lidl. This could leave it facing a squeeze on its identity and market share in future years, unless the company's management manages to steer around this potential hurdle.
In its half-yearly results today, Morrisons confirmed that it is on course to meet full-year expectations, cheering analysts and the markets, which were concerned it might be lagging behind its competitors in terms of sales growth. Morrisons currently trades at a slight discount to its competitors in terms of forward earnings, and could make a worthwhile addition to a retirement portfolio.
Expert selections
Although doing your own research is important, 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 31 December 2011.
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 owns shares in Tesco but does not own shares in any of the other companies mentioned. The Motley Fool owns shares in Tesco.
