Is Xstrata The Ultimate Retirement Share?

Published in Company Comment on 8 October 2012

Will shares in Xstrata 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 Xstrata (LSE: XTA), the big miner whose pending merger with Glencore International (LSE: GLEN) has kept it in the headlines in recent weeks. The merger may yet fall through, so is Xstrata an attractive retirement investment in its own right?

Up and down

Xstrata is generally well-regarded by investors, but as is common with mining shares, the company has delivered quite a varied performance against the FTSE 100 over the last 10 years:

Total Return20072008200920102011Trailing 10 yr avg.
Xstrata40.1%-81.2%75.2%35.0%-33.7%5.1%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%8.2%

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 suggests that Xstrata has the ability to perform strongly against the FTSE 100, but the volatility of recent years has prevented it outperforming the index over the last decade.

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 Xstrata shapes up:

ItemValue
Year founded2002
Market cap£28.3bn
Net debt£5.4bn
Dividend Yield2.6%
5 year average financials
Operating margin24.4%
Interest cover18.7x
EPS growth12.6%
Dividend growth40%
Dividend cover14.4x

Source: Morningstar, Digital Look, Xstrata

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

CriteriaCommentScore
LongevityIts origins as a mid-cap investment company date back to 1926, but it’s a newcomer to the big league.2/5
Performance vs. FTSEInvestors who bought shares in Xstrata's IPO could have quadrupled their money in 2008 -- but today the shares trade slightly below their IPO price.3/5
Financial strengthModerate gearing and attractive margins.4/5
EPS growthDecent growth and good prospects.4/5
Dividend growthDividend growth has been flattered by its recovery from hefty cuts in 2008/9.2/5
Total: 15/25

A score of 15/25 leaves Xstrata looking weak alongside some stronger candidates for a retirement portfolio, such as Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT). Despite this, Xstrata has been fairly successful during its short period on the LSE and its merger with Glencore International, which looks likely to succeed, is generally considered by analysts to be a good deal that will enhance the prospects of both companies.

Many Xstrata shareholders remain angry about the deal, which they see as selling the company on the cheap, but shares in 'Glenstrata' could be an attractive way to gain income-paying exposure to mining and commodities within a retirement portfolio, and Xstrata shares currently look good value to me, regardless of the merger outcome.

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 owns shares in Rio Tinto but does not own any of the other shares mentioned in this article.

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