Is Compass The Ultimate Retirement Share?

Published in Company Comment on 1 October 2012

Will shares in Compass Group 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 Compass Group (LSE: CPG), a global catering outsourcing company that operates on more than 7,000 sites around the world and employs 50,000 people.

Cooking up a storm

First, let's take a look at how Compass has performed against the FTSE 100 over the last 10 years:

Total Return20072008200920102011Trailing 10 yr avg.
Compass Group9.9%15.1%33.0%33.6%8.4%11.3%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%8.0%

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.)

The 10-year average trailing total return is pretty impressive and although the first few years of the new millennium were not so impressive for the catering giant, it has made up for it since then.

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 Compass shapes up:

Year founded1987*
Market cap£13.2bn
Net debt£848m
Dividend Yield2.7%
5 year average financials
Operating margin6.1%
Interest cover10.4x
EPS growth26.5%
Dividend growth14.5%
Dividend cover2.1x

Source: Morningstar, Digital Look, Compass Group

*Compass has its origins in Factory Canteens Ltd, which was founded in 1941 to feed war workers.

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

LongevityMiddle-aged origins, but a low-tech business that's unlikely to date.4/5
Performance vs. FTSEStrong but increasingly fully priced.4/5
Financial strengthHealthy and stable finances.4/5
EPS growthSteady and attractive.4/5
Dividend growthStrong and in line with earnings.5/5
Total: 21/25

Compass is not one of the most popular FTSE 100 shares with private investors, but it is a solid company with good long-term prospects that could make a very strong contribution to a retirement portfolio. Indeed, my only reservation is that it may be nearing the top of a valuation cycle. Earnings growth is slowing, but Compass's P/E of 18 is above the FTSE 100 average and is beginning to look a little high, unless earnings accelerate again.

Compass's financial year ends on 30 September and would-be investors might be advised to wait until its full-year results are published on 21 November. This could provide a fresh insight into the state of the business, and given the current state of the eurozone crisis, share prices might be lower, too.

My brief look at Compass Group has impressed me and I think its score of 21/25 is well deserved -- this company could definitely be a retirement share and is worth considering alongside fellow FTSE 100 support service companies G4S (LSE: GFS) and Serco (LSE: SRP).

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 any of the shares mentioned in this article.

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