Will shares in Wolseley plc (LON:WOS) 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 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 global plumbing supplies firm Wolseley (LSE: WOS) (NASDAQOTH: WOSYY.US), whose UK brands include Plumb Center and Parts Center.
Wolseley vs. FTSE 100
Let's start with a look at how Wolseley has performed against the FTSE 100 over the last ten years:
| Total Returns | 2008 | 2009 | 2010 | 2011 | 2012 | 10 yr trailing avg |
|---|
| Wolseley | -46.7% | -67.5% | 64.1% | 6.4% | 40.3% | -1.0% |
| FTSE 100 | -28.3% | 27.3% | 12.6% | -2.2% | 10.0% | 9.2% |
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.)
As you would expect, Wolseley was hit hard by the US and UK housing crashes and Wolseley missed out on the general stock market recovery in 2009, when it was forced to resort to a £1 billion rights issue to shore up its finances. However, the company slashed costs and restructured its operations and has since recovered strongly, outperforming the market by a big margin over the last three years.
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 Wolseley shapes up:
| Item | Value |
|---|
| Year founded | 1887 |
| Market cap | £8.0 bn |
| Net debt | £27m |
| Dividend Yield | 2.0% |
| 5 year average financials |
|---|
| Operating margin | 3.6% |
| Interest cover | 9.6x |
| EPS growth | 8.9% |
| Dividend growth | 49% |
| Dividend cover | 4.6x |
Source: Morningstar, Digital Look, Wolseley
Here's how I've scored Wolseley on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | 125 years in business. | 5/5 |
| Performance vs. FTSE | Wolseley has fallen behind the index over the last ten years. | 2/5 |
| Financial strength | Gearing has fallen and margins have risen over the last five years. | 4/5 |
| EPS growth | Earnings growth has helped a return to profitability. | 4/5 |
| Dividend growth | No payouts in 2008 or 2009, but a strong recovery since. | 3/5 |
| Total: 18/25 |
Wolseley's business is heavily cyclical and some of its recovery has been driven by a return to more healthy trading conditions in the USA and Canada, which accounted for 57% of revenue and 70% of trading profit in the first quarter of the current financial year. The company continues to see stagnant performance in the UK and declines in the Nordic region, France and Central Europe, which collectively account for a shrinking proportion of the company's profits.
Despite this, Wolseley has a long and respectable history, during which it has transformed itself from being one of the first British car manufacturers into a global plumbing and heating supplies business, with a strong presence in the US oil and gas industry as well as in house-building markets. Its self-help measures over the last five years have delivered impressive results -- the company has disposed of loss-making operations, repaid its debt, repaired damaged profit margins and even managed to fund a £350m cash return to shareholders.
My concern is that Wolseley has become heavily reliant on the North American market -- in particular the additional growth provided by the shale oil and gas sector. The proportion of profit provided by its US and Canadian operations is rising, while the company's other markets, including the UK, are failing to pull their weight. If the US recovery falters, Wolseley could be hit hard once more.
My Verdict
Wolseley's inability to pay a dividend for two years out of the last five reduces its appeal as a retirement share. Although the global financial crisis was unusually severe, many companies were able to continue paying dividends throughout this period and for me, reliability is a key attribute of a retirement share.
On the other hand, Wolseley has a long pedigree and I suspect it will continue to survive and thrive over the next few decades. Whether this appeal outweighs the risk of future disruption to the dividend is a decision only you can make. One thing I am sure of, however, is that I would not choose to buy Wolseley shares at their current valuation; in my view, the firm's growth prospects would have to be stronger than they are to justify Wolseley's current price-to-earnings ratio of 17.5 and its 2.0% dividend yield.
Top income picks
Doing your own research is important, but 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 High Income fund grew by 342% in the 15 years to 31 October 2012, during which time the FTSE All-Share index managed a gain of only 125%.
You can learn about Neil Woodford's top holdings and how he generates such fantastic returns 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.
> Roland does not own shares in Wolseley.
