Is G4S The Ultimate Retirement Share?

Published in Company Comment on 18 July 2012

Will shares in G4S 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 any time 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 G4S (LSE: GFS), the security outsourcing giant that is currently in the headlines over its failure to provide enough security guards for the Olympics. Is this a rare lapse from a well-run company, or is there trouble brewing?

The FTSE's biggest employer

G4S is the biggest employer on the London Stock Exchange, with more than 650,000 employees -- making its Olympic problems all the more surprising. It has outperformed the FTSE 100 on a total returns basis for four of the last five years, suggesting a history of strong earnings growth:

Total Return20072008200920102011Trailing 5 yr avg.
G4S32.7%-13.6%30.4%0.6%10.0%4.7%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%0.4%

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.)

I normally look at the company's trailing 10-year average and compare it to the FTSE 100, but G4S has only existed in its present form since 2004, so I've had to use the five-year figure, which shows that in recent years, G4S has outperformed the Footsie.

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 G4S shapes up:

ItemValue
Year founded2004*
Market cap£3.4bn
Net debt£1.8bn
Dividend Yield3.6%

5 year average financials

Operating margin5.5%
Interest cover3.7x
EPS growth8.2%
Dividend growth15.9%
Dividend cover2.2x

Source: Morningstar, Digital Look

*G4S was formed when Group 4 Falck merged with Securicor in July 2004.

Here's how I've scored G4S on each of these criteria:

CriteriaCommentScore
LongevityA 77-year history of corporate evolution, but only eight in its current form.3/5
Performance vs. FTSEG4S has generally outperformed the FTSE 100 since its 2004 listing, but that's a relatively short period to judge by.3/5
Financial strengthG4S has low margins and quite high debt, reflecting tough competition and high costs.2/5
EPS growthEarnings growth has been strong but may be beginning to slow.3/5
Dividend growthG4S has increased its dividend every year since it listed on the LSE and its annual average increase is well above inflation.4/5

Total: 15/25

A score of 15/25 is pretty average and suggests that while G4S could be a candidate for a retirement fund portfolio, it does have some weaknesses, which brings me to my next tip.

Expert selections

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Further investment opportunities:

> Roland does not own shares in G4S.

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Comments

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mrburns2050 18 Jul 2012 , 6:37pm

I've looked at G4S and Serco as i have no exposure to this market.

Dividends have never been high enough for my liking with either company.

With G4S currently sitting around 3.50 yield and the prospect of the share price increasing once the media frenzy has passed. Don't normally do speculating but this looks too good a opportunity

Biggest concern is the massive debt


Any one agree?



F958B 18 Jul 2012 , 7:16pm

I don't see the debt as a problem (it's high, but their revenues are fairly predictable).
What I see as the main risk is the loss of future contracts.

I'm interested, but I'd like to see the dust settle. If G4S rocket upwards from here and run away from me, I'll easily find something else to invest in, so no big loss.

Take a look at the Tesco share price chart to see that when a share drops hard on "bad news", there is often a bounce and then a slower decline to even cheaper levels than the initial drop.

mrburns2050 18 Jul 2012 , 7:43pm

Cheers F958B

Think it were you that commented on my Barclays post.

I don't see them loosing future contracts. before long this will all be forgotten about. they will still be the biggest by a long shot. (will say we have learnt from this and are now a stronger company) Will still compete for the most contracts and due to size and price cutting will most likely win.

Haven taken your advice on board about looking into the bounce then roll effect though.

Could easy spend this money 3 times over adding to what i hold. So will wait to see if they get cheaper due to more Olympics bad news then look to invest. If Not future pension money will go else were.

Cheers




thegoodduck 22 Jul 2012 , 10:27pm

I agree. I have come across people who work for the company. Stress levels are usually high, pay not regular, lots of typical management issues. I am not sure this is the right time for me to invest in G4s. I would go with F958Bs advice - wait and watch, let dust settle.

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