A Special Report

A Motley Fool Special Report

5 Shares To Retire On

A Motley Fool Special Report

The Motley Fool’s
Five Shares To Retire On

An older couple and their dog, heading down to the beach for the day.

Credit: Getty Images.

Taking trips to sunny beaches…

Enjoying fabulous food and fine wine…

Relaxing in peace and quiet in a country home…

Sports cars.

These are just a few of the things investors dream about when they look over their retirement portfolios.

Whatever your fancy, your retirement portfolio can be your key to financial freedom, and that freedom can depend on the quality of your investment decisions.

Unfortunately, there is no secret to immediate wealth, and building a successful retirement portfolio rests mainly on a savings schedule (i.e. living below your means, so you can put aside a decent amount) that can be boosted by choosing the right sort of investments.

Decisions, decisions…

Which shares you put into your portfolio depends on what type of investor you are. For example, how long do you have until retirement? How much volatility can you handle? Do you hold other asset types (bonds, property, or gold)?

However, we firmly believe that companies with healthy balance sheets, dominant market positions, and reliable cash flows should form the core of every investor’s portfolio, retirement or otherwise. The five shares discussed in this special report demonstrate all or most of these characteristics, and we think they should form an excellent foundation upon which you can then add further investments.

Getting the ball rolling…

At first glance, you might not think these five are most exciting of shares, but that’s exactly the point. We’re looking for shares that can form the heart of your portfolio — companies you can buy into and you shouldn’t have to watch every day.

We reckon that a well-diversified portfolio should have at least 15 shares, so there is plenty of room to add some riskier, more exciting shares if you so choose.

And our selection of five shares begins with a giant in the world of consumer brands…

Share To Retire On #1


Mayonnaise ingredients

Credit: Getty Images.

Unilever (LSE: ULVR) boasts an impressive portfolio of brands across personal care (Lux and Dove), foods (Knorr and Hellmann’s), home care (Cif and Surf), and refreshment (Lipton and Heartbrand). In fact, it has 13 brands that can boast more than €1 billion in sales a year, and its total annual sales come to over €50 billion (note that Unilever reports in euros because of its Anglo-Dutch roots).

Unilever sells its products in 190 countries to 2.5 billion consumers every day, and over half of those sales are happening in emerging markets (a characteristic that sets Unilever apart from many of its competitors).

The company’s sales to emerging markets grew 6.5% last year, while sales in developed markets like America and Europe were flat.

A combination of advertising and innovation should keep the company’s brands prominent in consumers’ minds, and up to speed with changing tastes and needs.

For example, Unilever spends around €7 billion annually on advertising, while also spending heavily on creating new or modified products and packaging.

Unilever’s investment in its brands should also provide it with pricing power, as consumers tend to pay up for the quality that they have come to associate with their favourite products.

Unilever’s products tend to be relatively inexpensive and purchased frequently (they’re sometimes referred to as Fast Moving Consumer Goods, or FMCG), and they are sold around the world.

This should mean that, as long as the company’s brand appeal remains intact, its cash flow should be relatively resilient, regardless of economic conditions. People like to eat and shower (though generally not at the same time), even when times are tough.

The company’s focus on emerging market consumers should mean that it can also perform well when things pick up. Increased wealth and buying power in fast-growing markets should drive demand for more dishwashers and washing machines, which should create a whole new group of Unilever customers.

This steady stream of sales, and the company’s emphasis on improving efficiency wherever possible, mean the company’s €14 billion of net debt doesn’t overly concern us.

Over the last twelve months, Unilever generated almost €5 billion in free cash flow, which easily covered its debt obligations. Reassuringly, much of the company’s debt maturities are spread out until 2032, which shouldn’t present too much of a repayment or refinancing problem.

Unilever’s dividend yield isn’t the highest around, but the company’s strong cash flow should help bolster it in times of turmoil. That said, Unilever did reduce its final dividend payment in 2009, amid the worst of the financial crisis. Its payout has recovered since, and Unilever should be able to grow it going forward.

The company rejected a $143 billion offer from the US company Kraft Heinz last year. In our view, this underlines the value of Unilever’s brands and long-term prospects. With more brands than any other company in Kantar Worldpanel’s Global Top 50 Index, we expect Unilever to continue to deliver strong growth.

Share To Retire On #2

National Grid

Cropped torso of a powerline worker holding his hard hat under his arm, with a high voltage pylon in the background

Credit: Getty Images.

As we said earlier, excitement isn’t what we’re looking for as we build the core of a retirement portfolio, so the boring activities of National Grid (LSE: NG) could be just the ticket.

National Grid owns and operates the electrical lines and natural gas pipelines across England and Wales (as well as operating two electricity transmission networks in Scotland).

Across the Atlantic, National Grid has similar operations in the north east of the United States. The company also owns and operates liquid natural gas (LNG) storage facilities, which help feed its pipelines.

The UK transmission operations generated £1.2 billion in operating income last year, or 28% of the company’s £4.3 billion in total operating income, while the US operations provided £1.5 billion (35%), and the UK gas transmission business generated another £0.5 billion (10%). Other activities, including the discontinued gas distribution business, accounted for the remainder of operating income.

In December 2016, National Grid announced a one-off £4bn return of capital to shareholders, after selling a 61% stake in its UK gas distribution business. The proceeds were returned to shareholders through a £3.2 billion special dividend and share buy-backs after the business was sold in March 2017.

This should mean that National Grid can now focus on its UK and US transmission operations, which we think should deliver consistent cash flows.

We think National Grid has a pretty nice set up. Aside from a couple of power plants in the US, most of what the company does involves charging others for using its power lines or pipes — a toll booth scenario, you could say.

Apart from storm damage and basic maintenance, the daily operations of National Grid shouldn’t be all that intense — it can almost just sit back and watch the cash roll in.

However, there is no such thing as a free lunch. The company’ assets require heavy up-front investment — National Grid spent £4.3 billion on capital investment last year, and plans to invest some £40 billion between now and 2021.

Its assets are vital to the economy and customers, and this provides the company with a monopoly. As a result, the bulk of its operations are regulated in both the UK and US. This means the government provides the company with nearly guaranteed returns, in exchange for the promise of stability.

As long as National Grid makes the necessary investment in its distribution networks to keep the juice flowing, it has an excellent chance of making a solid return on that investment.

This arrangement also allows National Grid to fund its investments through affordable debt, because its lenders know there should be relatively stable cash flows underpinning the company.

This is why investors don’t seem overly concerned about the £23 billion in net debt on the company’s balance sheet.

Of course, fluctuations in economic activity and the weather can alter how much demand there is for electricity and gas (if fewer widgets are getting manufactured, there will be less demand for electricity, and unseasonably warm winters mean less gas is needed for heating).

However, we reckon there are few things more reliable in our modern society than the ongoing need for energy.

This backdrop has allowed National Grid to reward its shareholders with a strong and growing dividend. Since 2008, National Grid’s dividend has grown an average of 3.4% per year, although last year it was up just 2%. The company’s dividend policy aims to grow the dividend at least in line with RPI inflation each year for the foreseeable future.

Political and regulatory risk in the UK has increased of late — with the latest opinion polls putting Labour and the Conservatives neck and neck. For this reason, management is focused on expanding in the US, and plans to invest more than half of its capital spending budget this year in the US.

In our view, a greater focus on the US should reduce the political and regulatory risk in the UK to the overall business.

We think National Grid offers long-term investors an attractive income stream, and it’s just the type of investment we’re looking for at the heart of a retirement portfolio.

Share To Retire On #3

Reckitt Benckiser

A collection of brightly coloured cleaning product bottles

Credit: Getty Images.

Say the name “Reckitt Benckiser” to most people and you’ll probably draw a blank expression. Mention Nurofen, Dettol, Strepsils and Durex however, and millions of people around the world will instantly know the products you’re talking about — blockbuster household names that you’ll find in homes and supermarkets across the globe. Reckitt Benckiser (LSE: RB), formed when Reckitt & Coleman and Benckiser NV merged in 1999, is the consumer products giant behind those world-class brands.

Big brands can be a long-term investor’s best friend — unlike most valuable assets, they require little capital expenditure to maintain. Instead of depleting in usefulness each year, the brand becomes more embedded in our lives, and instead can become more valuable. Few things command the same kind of protection for consumer demand as a successful brand — and we think Reckitt’s product portfolio is up there with the best.

Successful brands like Vanish and Air Wick tend to have remarkable pricing power, enabling Reckitt to increase its prices and achieve lucrative 31% profit margins in developed markets.

The company also generates roughly 30% of its sales from emerging markets — a proportion that we expect to continue to increase in the coming years. As Reckitt’s brands become more embedded in these markets, and as real wages gradually improve, we think consumers in these regions should buy more and more of Reckitt’s branded goods. And as more and more burgeoning consumers grow up with Reckitt’s products, we think these markets could be even more lucrative than the UK in the long run.

While we would describe Reckitt as having a more stable, predictable business than most companies, we have to admit it’s unlikely to enjoy anything other than slow and steady sales growth in the future.

That means we’re paying a reasonable premium for the quality of Reckitt’s business. We need to hope Reckitt lives up to our expectations for steady long-term growth, or investors may have to wait for longer for the investment to pay off.

In February 2017, the company announced it had agreed to acquire Mead Johnson for $16.6 billion. The acquisition brought the world’s leading infant nutrition brand, Enfa, into the Reckitt stable. But although Reckitt has a track record of effectively integrating consumer health companies, the size of this deal does present a risk.

But in our view, if bought at a fair price (or purchased over time through pound-cost averaging) Reckitt could be an excellent long-term staple holding. In short, we love the stability, predictability, and economics of Reckitt’s business — and we think it could be the perfect underpinning of a long-term portfolio.

Share To Retire On #4


A glass of whiskey-on-the-rocks

Credit: Getty Images.

When building a strong core for your retirement portfolio, big can be beautiful, because large companies should have the geographic and product diversification to weather most storms. And in the spirits business, they don’t come any bigger than Diageo (LSE: DGE).

Diageo also appeals because of the relatively defensive nature of its products — people continue to buy alcohol in good times and bad, and often view it as a small luxury, and seem to be willing to splurge a bit on brand names.

Speaking of which, Diageo has lots of brand names: Johnnie Walker — the world’s number one Scotch whisky, Smirnoff, Baileys, Captain Morgan, and Guinness are just a few of the headliners among the company’s dozens of labels.

Diageo gets over 75% of its sales from spirits, and can claim 7 of the top 20 spirit brands in the world. The worldwide popularity of Guinness drives its beer business, which contributes 16% of annual sales.

The remainder is composed of wine and ready-to-drink beverages (a rather confusing title for pre-mixed cocktails).

Just as impressive as its brand portfolio is its global reach. Diageo’s products are sold in 180 markets around the world. Last year, emerging markets accounted for 28% of operating profits.

In recent years, Diageo has splashed out £1.3 billion for Mey Icki, the largest distiller in Turkey, £1.3 billion for a controlling stake in India’s United Spirits, and £280 million for Brazil’s Ypioca.

Over the past three years, Diageo has poured out £5 billion to promote its brands. All this activity has pushed its net debt up to £9 billion, but we think this looks manageable, given its £2.7 billion of free cash flow last year.

Although Diageo’s dividend yield is lower than most blue chips, its payout has been growing nicely recently. It’s up an average of 8% per year over the last five years, and 5% on last year.

The spirits industry is a rather mature one, especially in Europe and North America, but we believe that Diageo’s strong brand portfolio and growing presence in the rapidly growing emerging markets should provide it with the ability to keep growing cash flow — and its dividend — for years to come.

Adding Diageo shares to the core of your retirement portfolio could have you enjoying a little high-end tipple, when you eventually kick back and enjoy those dreamy sunsets on foreign beaches.

Share To Retire On #5


Female fashion model, modelling a trench coat

Credit: Getty Images.

Shares of the highest quality companies in the world should be a core component of all investors’ portfolios. We reckon that luxury apparel company Burberry (LSE: BRBY) could be just such a business.

Founded in 1856, and famous for its chequered designs (and iconic trench coat), Burberry is a premier British brand that has gone global. The company has an incredible history in designing innovative clothing. Its designs were worn by great explorers of the age like Roald Amundsen, the first man to ever reach the South Pole.

During the First World War, Burberry was commissioned by the British War Office to create an officer’s coat suitable for the conditions of modern warfare — and the iconic Burberry trench coat was born, along with its famous patterned lining, synonymous with Burberry to this day. Its designs became popular with civilians after the war, and the rest is history.

Burberry’s brand has not only endured, but evolved. Don’t be fooled by Burberry’s old-fashioned heritage — it’s one of the fastest growing brands in the world today, according to experts Interbrand, expanding quicker than rivals like Louis Vuitton, Gucci and Prada, and the brand itself is valued more richly than the likes of Hugo Boss and Ralph Lauren.

The company’s management, and its ability to bring the Burberry brand into new markets — while still generating excellent profit margins and return on capital — impresses us.

Burberry can boast global leadership in utilising technology as a means of improving retail experience and brand awareness. We see it as an organisation with innovation at the heart of its culture, a company built for the modern age. And that future might look bright for Burberry, if demographic trends continue to gradually work in its favour.

In emerging markets, consumers are becoming increasingly affluent — and Burberry has positioned itself to benefit from global growth in the future. It already generates 40% of its sales in Asia — partly driven by the 1 million middle-class Chinese households earning more than $75,000 a year currently. The Economist predicts that in just 15 years, over 70 million households in China could earn that much — that’s a lot of potential new wealthy consumers, in a market where Burberry is building a reputation as a leading luxury brand.

Burberry has seen some management changes recently, with creative lead Christopher Bailey due to leave the company in 2018 and the former boss of LVMH brand Céline, Marco Gobbetti, becoming CEO and announcing a strategy to take the brand more upmarket.

The new strategy could mean the company’s growth pauses somewhat for a couple of years, but we like the clarity with which the new direction has been laid out.

Admittedly, Burberry’s luxury offerings are expensive. In the event of a global downturn in consumer confidence, it’s possible that consumers around the world would delay their purchases of high-end items, or opt for cheaper brands instead. Another factor outside of the company’s control is exchange rates — which can affect the company’s reported profits from one year to the next.

We think that it’s important that Burberry keeps on top of changing consumer preferences, while remaining true to its core creative direction — not only at home, in its established markets, but abroad as well. Marco Gobbetti needs to keep moving Burberry forward as both a brand, and as a modern, global company in the years ahead.

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Disclosure: The Motley Fool owns shares in Unilever, and has recommended shares of Burberry, Diageo and Reckitt Benckiser. This report was last updated on 26th January 2018.

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