Will shares in CRH 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 CRH (LSE: CRH) (NYSE: CRH.US), the Irish building materials specialist with an increasingly global footprint.
It goes without saying that CRH was hit hard by the property market crashes in Europe and the USA. Despite this, it has remained profitable -- so how has it performed against the FTSE 100 over the last 10 years?
|Total Return||2007||2008||2009||2010||2011||Trailing 10 yr avg.|
(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.)
CRH's 10-year average trailing total return is pretty dire and investors would have done well to avoid CRH shares after the property boom started to overheat. But retirement investing is all about drawing income from long-term holdings, with minimum trading. So how does CRH look as a buy, now that the boom is over?
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 CRH shapes up:
|5 year average financials|
Source: Morningstar, Digital Look, CRH
*CRH was formed when Cement Ltd and Roadstone merged in 1970.
Here's how I've scored CRH on each of these criteria:
|Longevity||Approaching middle age, but in a long-life industry.||3/5|
|Performance vs. FTSE||It's not been a good decade.||2/5|
|Financial strength||Gearing has fallen in recent years, but so have operating margins.||3/5|
|EPS growth||Growth remains elusive.||3/5|
|Dividend growth||Perhaps too generous? Dividend cover has been just 1.35 for the last two years.||4/5|
A score of 15/25 is slightly below average and suggests that CRH is not a strong candidate for a retirement fund portfolio. While the shares offer an attractive yield of 4.4% at present, they look expensive based on brokers' forecasts for this year's earnings, which place the shares on a forward P/E of 17.9, according to Morningstar.
Although CRH's US business has started to pick up, its emerging markets businesses are struggling to grow. The eurozone crisis is increasingly dragging down central and eastern European economies, and even CRH's Asian businesses are struggling to grow profits thanks to a combination of rising costs in India and falling volumes in China.
I think that CRH is a decent business with a long-term future -- we won't stop needing cement -- but I suspect that there may be plenty more downside to come before it recovers. This, combined with its cyclical nature, means I would not consider adding CRH to my retirement portfolio at the moment. For me, a far more appealing way to get exposure to the global construction industry would be through a services company such as Balfour Beatty (LSE: BBY), which offers a decent dividend and far more stable earnings.
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 any of the companies mentioned in this article.