Is Kingfisher The Ultimate Retirement Share?

Published in Company Comment on 11 October 2012

Will shares in DIY giant Kingfisher 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 Kingfisher (LSE: KGF), the company that owns B&Q and Screwfix, plus the French DIY chains Castorama and Brico Dépôt.

DIY Success?

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

Total Return20072008200920102011Trailing 10 yr avg.
Kingfisher-34.5%-3.6%73.6%17.4%-1.9%4.1%
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.)

Things don't get off to a good start, as Kingfisher's trailing 10-year average total return is half that of the FTSE 100, suggesting that you'd have been better off putting your money into an index tracker. However, the company's present dip in form might provide a good buying opportunity -- so let's look at it a little more deeply.

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 Kingfisher shapes up:

ItemValue
Year founded1982
Market cap£6.3bn
Net debt£155m
Dividend Yield3.3%
5 year average financials
Operating margin5.6%
Interest cover12.7x
EPS growth18.5%
Dividend growth-0.3%
Dividend cover2.9x

Source: Morningstar, Digital Look, Kingfisher

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

CriteriaCommentScore
LongevityThirty years is not much, but DIY looks like a good long-term prospect.3/5
Performance vs. FTSENot bad, but not amazing.3/5
Financial strengthLow debt, rising margins and generous dividend cover.4/5
EPS growthRecent years have seen strong growth, but this year's wet weather hit sales hard.4/5
Dividend growthDividends were cut in 2007/8 and have grown since then, but remain below 2006/7 levels.3/5
Total: 17/25

Despite B&Q's poor fortunes this summer -- thanks to record wet weather -- it's hard to imagine that the market for DIY materials will ever seriously subside. B&Q's dominance may be relatively new, but the need for its products isn't and in countries such as the UK, where home ownership is a national obsession and much of our housing stock is old and in need of regular maintenance, this seems unlikely to change. What's more, Kingfisher also has a healthy presence in the trade market, providing counter and delivery services to small businesses, via its B&Q Trade and Screwfix brands.

A score of 17/25 is reasonable and suggests that it might be worth considering Kingfisher alongside other retail shares when building a retirement fund portfolio. Despite this, I won't be adding it mine, as I prefer to invest in the more essential retail services provided by supermarkets -- in particular Tesco (LSE: TSCO) and Sainsbury (LSE: SBRY) -- where although customers might cut back on luxuries, core purchases are less easily postponed or avoided.

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 Tesco but does not own any of the other shares mentioned in this article. The Motley Fool owns shares in Tesco.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

AndrewMBaines 14 Oct 2012 , 8:08am

You're comparing the performance of the FTSE 100 which doesn't include dividends with the performance of a share WITH reinvested dividends.
This is the same nonsense pedalled by every fund manager - you have to compare with the FTSE 100 with reinvested dividends, otherwise you're not comparing like with like.
Not saying Kingfisher isn't a good buy, just that you can't do maths.

sopavest 14 Oct 2012 , 6:24pm

Hello Andrew,

Thanks for your comment. When comparing the company performance with that of the FTSE 100, I use the FTSE 100 Total Returns index -- which assumes all dividends reinvested -- and compare that to the company performance, also with dividends reinvested.

This means it is a like-for-like comparison.

Hope this helps clear things up.

Regards,

Roland (article author)

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.