Is Sports Direct International Plc The Ultimate Retirement Share?

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 Sports Direct International (LSE: SPD), the profitable and fast-growing sportswear retailer, which was recently promoted to the FTSE 100.

Sports Direct International vs. FTSE 100

Let’s start with a look at how Sports Direct has performed against the FTSE 100 over the last 10 years:

Total Returns 2008 2009 2010 2011 2012 2013 YTD

5 year

Sports Direct -60.1% 135.5% 64.6% 33.1% 81.1% 83.1% 68.8%
FTSE 100 -28.3% 27.3% 12.6% -2.2% 10.0% 12.9% 9.3%

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.)

Sports Direct’s sparkling growth performance over the last five years highlights how investing in smaller, FTSE 250 firms can deliver outsized gains. Sports Direct’s sales have risen from £1.3bn in 2008 to £2.2bn this year, and its profit margins have also kept pace with this impressive growth.

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 Sports Direct shapes up:

Item Value
Year founded 1982
Market cap £4.2bn
Net debt £154m
Dividend Yield 0%
5 year average financials
Operating margin 8.3%
Interest cover 21.1x
EPS growth 35.5%
Dividend growth n/a
Dividend cover n/a

Here’s how I’ve scored Sports Direct on each of these criteria:

Criteria Comment Score
Longevity 31 years isn’t bad, but I prefer longer histories for retirement shares. 3/5
Performance vs. FTSE Outstanding. 5/5
Financial strength Low gearing, decent margins and plenty of cash. 4/5
EPS growth Profitability has kept pace with turnover growth. 4/5
Dividend growth No regular dividend policy is bad news for retirees. 1/5
Total: 17/25

Sports Direct’s share price has risen by 242% in the last two years alone. However, the lack of a regular dividend policy is a severe handicap. In my view, retirement investors shouldn’t have to rely on capital gains for their income — reliable dividends are my goal. Sports Direct hasn’t paid a dividend since 2010, and, for me, its ad-hoc approach to shareholder returns rules it out as a retirement share, despite the shares scoring a respectable 17/25.

Today's top growth buy?

Sports Direct currently trades on a pricey 21.5 times its 2013 forecast earnings, but the Fool's analyst have identified another great growth story that currently trades on just 14.5 times forecast earnings and pays a regular dividend.

The company in question outperformed the FTSE 100 by 32% in 2012, has delivered earnings per share growth of 44% since 2009, and is ahead of the FTSE so far this year.

For full details, click here to download this new Motley Fool free report, "Today's Top Growth Stock", but hurry, as availability is strictly limited.

> Roland does not own shares in Sports Direct International.