Will shares in Johnson Matthey 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 Johnson Matthey (LSE: JMAT), the chemicals business that's one of the world's main producers of automotive catalytic converters.
Johnson Matthey has performed strongly against the FTSE 100 over the last 10 years, as these figures show:
|Total Returns||2007||2008||2009||2010||2011||10 yr trailing 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.)
Johnson Matthey's 10-year average trailing total return is impressive and places its total returns firmly ahead of those of the FTSE 100.
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 Johnson Matthey shapes up:
|5 year average financials|
Source: Morningstar, Digital Look, Johnson Matthey
Here's how I've scored Johnson Matthey on each of these criteria:
|Longevity||Almost 200 years is pretty impressive.||5/5|
|Performance vs. FTSE||It's beaten the index over the last decade.||4/5|
|Financial strength||Modest debt, stable margins and ample interest cover.||4/5|
|EPS growth||Decent growth in recent years.||4/5|
|Dividend growth||Strong growth rate, albeit below average yield.||4/5|
Although Johnson Matthey's current dividend yield of 2.4% is below the FTSE 100 average, dividend growth is one of the most important attributes for long-term retirement investing, as you need your income to keep pace with inflation. Johnson Matthey scores very well in this regard, as its annual dividend payments have risen from 19p in 1999 to 46p in 2011 -- an increase of 242% in twelve years. What's more, the dividend rose every single year during that period.
Anyone who invested in Johnson Matthey at the end of 1999 would have paid around 700p per share and received an initial dividend yield of around 2.7%. Today, that original investment would provide a dividend yield on cost of 6.5%, better than the vast majority of FTSE 100 shares and highlighting the value of dividend growth and long-term holding in retirement investing. By taking this approach, you would not have had to worry about the capital value of your shares falling by 57% in 2008 -- your income would have continued to rise regardless, and sure enough, the share price has also since recovered.
I think Johnson Matthey's score of 21/25 is well-deserved and suggests that it could be a strong candidate for a retirement fund portfolio, especially if your retirement is still at least five or ten years away.
Top income picks
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 only invests in companies that can provide sustained dividend growth, and his income 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.
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Further investment opportunities:
> Roland does not own shares in Johnson Matthey.