Is Serco The Ultimate Retirement Share?

Published in Company Comment on 29 August 2012

Will shares in Serco 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 (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 Serco Group (LSE: SRP), the FTSE 100 outsourcing giant that published its half-yearly report today.

Governments love outsourcing

Serco has performed strongly against the FTSE 100 over the last 10 years, as successive governments worldwide have become progressively more enthusiastic about outsourcing:

Total Return20072008200920102011Trailing 10 yr avg.
Serco22.0%-1.6%18.8%6.1%-13.3%12.9%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%6.8%

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.)

Serco's trailing 10 year average total return is double that of the FTSE 100 and suggests that it could make a very attractive retirement portfolio share.

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 Serco shapes up:

ItemValue
Year founded1929
Market cap£2.8bn
Net debt£633m
Dividend Yield1.5%
5 year average financials
Operating margin5.3%
Interest cover6.7x
EPS growth16.8%
Dividend growth19.8%
Dividend cover4.6x

Source: Morningstar, Digital Look, Serco

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

CriteriaCommentScore
LongevityA respectable age.4/5
Performance vs. FTSETop class.5/5
Financial strengthPretty solid, despite a rise in debt this year.4/5
EPS growthEnviably impressive and consistent.4/5
Dividend growthExcellent growth rate, but a low yield and rather miserly level of dividend cover.4/5

Total:21 /25

Serco's 1.5% yield will not be appealing to anyone planning to retire in the next 5 years or so, but if your investing horizon is longer, then this share offers the potential to deliver strong capital growth and an attractive income. Indeed, if you were wise enough to buy Serco shares 10 years ago, you would be enjoying a 4.7% yield on cost and a 210% capital gain today.

Serco's score of 21/25 is very respectable and makes the company a very credible candidate for a retirement fund portfolio.

Expert selections

One 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 dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits 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.

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Further investment opportunities:

> Roland does not own shares in Serco.

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Comments

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LastChip 29 Aug 2012 , 12:39pm

12/25 isn't at all respectable, but 21/25 is!

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