Will shares in Whitbread plc (LON:WTB) 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 Whitbread (LSE: WTB) (NASDAQOTH: WTBCY.US), the company that runs UK hotel and restaurant chains including Costa Coffee, Premier Inn and Brewers Fayre.
Whitbread vs. FTSE 100
Let's start with a look at how Whitbread has performed against the FTSE 100 over the last 10 years:
|Total Returns||2008||2009||2010||2011||2012||10 yr trailing avg|
(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.)
Whitbread's 10-year average trailing total return is 2.4 times that of the FTSE 100, highlighting the strong shareholder returns this company has delivered over the last decade.
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 Whitbread shapes up:
|5 year average financials|
Here's how I've scored Whitbread on each of these criteria:
|Longevity||One of the UK's oldest companies.||5/5|
|Performance vs. FTSE||Very strong.||5/5|
|Financial strength||Decent margins moderate debt, although cash flow is tight.||4/5|
|EPS growth||Steady and attractive.||4/5|
|Dividend growth||Growth in-line with earnings.||4/5|
With nearly 300 years of operating history, Whitbread's ability to evolve and adapt isn't really in question, although it's worth noting that until 2001 it was primarily a brewer and pub operator. The company's management believes that hotels and restaurants offer superior growth prospects to pubs and beer, and the fact that Whitbread has delivered a 24.2% average annual return over the last ten years suggests that they may be correct.
In Whitbread's latest trading statement, it reported another quarter of strong growth, especially for the Costa Coffee and Premier Inn businesses, both of which are expanding aggressively. Globally, Whitbread is on course to open 320 new Costa stores and 1,300 Costa Express units in the 2012/13 financial year, and it expects to have opened 4,300 new Premier Inn rooms in the UK during the same period.
This rapid growth fuelled a 32.2% rise in Costa sales in the 11 weeks to 14 February 2013, along with a 14.1% rise in Premier Inn sales. Like-for-like sales rose too, suggesting that at the moment, the company is meeting demand, rather than anticipating it. I do have some reservations about how far this growth can continue -- in recent years, we've seen Starbucks forced to scale back its growth ambitions -- and I wonder whether Costa and Whitbread might end up in the same boat, in a few years' time.
Whitbread's growth has resulted in its shares doubling in value over the last five years, meaning that they currently trade on a price to earnings ratio (P/E) of 17.5, based on this year's expected earnings. Although this isn't outrageous, it isn't cheap either, and any disappointment could result in the share price slipping back to a more conservative rating. What's more, Whitbread's forward dividend yield of 2.4% is below the FTSE average and has only been covered by free cash flow twice in the last six years, due to heavy capital spending on expansion. This could make the dividend vulnerable if profits fall -- not ideal in a retirement share.
Overall, I think that Whitbread's pedigree is impressive, but much of its growth potential is already factored into the price, reducing its appeal as a retirement share. In comparison, the company I mention below has delivered similar growth performance, but currently has a much lower P/E rating, stronger cash flow, and a higher dividend yield, making it a more attractive option, in my view.
2013's top growth stock?
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The company in question outperformed the wider market by 32% in 2012 and has continued to move ahead of the FTSE 100 in 2013. It operates a number of businesses that are household names and has been very successful at profiting from an important new technology, unlike some of its peers.
All the details are available in this new free report, "The Motley Fool's Top Growth Stock For 2013", and if you would like to know more, I would strongly recommend you click here to download this report immediately -- it's completely free, but it will only be available for a limited time.
> Roland does not own shares in Whitbread or Starbucks.