Is BSkyB The Ultimate Retirement Share?

Published in Company Comment on 24 September 2012

Will shares in British Sky Broadcasting 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 British Sky Broadcasting Group (LSE: BSY), the satellite broadcaster with more than 10 million subscribers in the UK.

Getting the picture

To start with, let's take a look at how BSkyB has performed against the FTSE 100 over the last 10 years:

Total Return20072008200920102011Trailing 10 yr avg.
British Sky Broadcasting21.6%-19.8%20.8%34.4%2.7%5.0%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%8.1%

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.)

BSkyB shares went through a lacklustre period in the early noughties but have performed strongly recently, delivering total returns well in excess of those of the FTSE 100 over the last five years. BSkyB has proved a surprisingly defensive share during the recession, as customers have proved reluctant to cut back on home entertainment.

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 BSkyB shapes up:

ItemValue
Year founded1990
Market cap£12.2bn
Net debt£1.2bn
Dividend Yield3.5%
5 year average financials
Operating margin16.1%
Interest cover7.2x
EPS growth14.8% (adj.)
Dividend growth10.8%
Dividend cover1.8x

Source: Morningstar, Digital Look, British Sky Broadcasting

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

CriteriaCommentScore
LongevityStill a youngster.3/5
Performance vs. FTSEGood in recent years, but retirement investing is a marathon, not a sprint.3/5
Financial strengthHealthy cash flow and manageable debt.4/5
EPS growthDecent, albeit aided by share buybacks.4/5
Dividend growthVery attractive dividend policy.4/5
Total: 18/25

A score of 18/25 is very reasonable and suggests that BSkyB could be a good candidate for a retirement fund portfolio. BSkyB's youth -- it's only 22 years old -- means that it is hard to gauge the prospects for the business in another 22 years' time. The growth of television being delivered by internet means that receiving your television by satellite could become outmoded, but I suspect that this will take at least a decade to become realistic. What's more, even if it does happen, BSkyB's content business, the Sky television channels, will continue to attract subscribers, as will its own-branded broadband and phone services.

Sky is a large and successful business but its youth and technology-dependent business model means that I might hesitate to add it to my retirement portfolio. Although I suspect that it will survive in some form, the level of change and adaptation necessary to survive another two decades or more could leave it looking like a different company altogether, meaning an uncertain outcome for shareholders.

Expert selections

Doing your own research is important, but another good 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.

The good news is that 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.

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

> Roland does not own shares in British Sky Broadcasting Group.

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