Is Aggreko The Ultimate Retirement Share?

Published in Company Comment on 6 November 2012

Will shares in Aggreko 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 Aggreko (LSE: AGK), a leading supplier of temporary power generation equipment, whose share price dropped 8% recently after it downgraded its profit expectations for this year.

Electrifying performance

Aggreko has grown strongly over the last decade, outperforming the FTSE 100 by a massive margin:

Total Returns2007200820092010201110 yr trailing avg
Aggreko24.0%-14.7%111.0%60.9%33.2%34.1%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%7.3%

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.)

Aggreko's 10-year trailing average return is nearly five times that of the FTSE 100, but growth has slowed this year and the company's returns so far are roughly level with 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 Aggreko shapes up:

ItemValue
Year founded1962
Market cap£5.8bn
Net debt£364m
Dividend Yield1.0%
5 year average financials
Operating margin22.9%
Interest cover16.7x
EPS growth38.2%
Dividend growth24.9%
Dividend cover4.9x

Source: Morningstar, Digital Look, Aggreko

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

CriteriaCommentScore
LongevityStill a relative youngster.3/5
Performance vs. FTSEOutstanding.5/5
Financial strengthHigh margins, moderate debt and generous interest cover.4/5
EPS growthVery strong.5/5
Dividend growthStrong growth but low payout ratio means yields will remain low.3/5
Total: 20/25

A high score of 20/25 reflects Aggreko's strong recent growth, but this could be changing. Profits from Aggreko's Local business -- which provides temporary power to one-off events such as the 2012 Olympics -- have been dwarfed in recent years by profits from its International Power Projects division. This operation has boomed as fast-growing emerging economies with decrepit infrastructure have needed fast, reliable supplies of extra electricity. While that need hasn't gone away, this division's powerful growth phase appears to tapering off.

The market lopped 8% from Aggreko's share price in October following a trading update, in which the firm forecast a 2.5% decline in profit this year, thanks to some unusually high delivery costs (taking the generators into remote locations) and an increase in bad debts. A few days later, Aggreko's smaller peer, APR Energy (LSE: APR), issued a profit warning that showed a shrinking order book and a series of delayed contracts.

When two competing companies both issue profit warnings at the same time, a slowdown in the wider sector seems likely. I remain confident in Aggreko's future prospects but I certainly would not buy shares in the company for my retirement portfolio at present -- I suspect they may have further to fall and in any case remain too expensive and generate too little income, thanks to their forecast P/E of 21 and forward yield of 1.1%. There are much better income opportunities elsewhere.

Top income picks

Aggreko may not be the right choice for an income-driven portfolio, but there are plenty of attractive alternatives in the FTSE 100 that could make good retirement shares, and you can discover some of these by studying 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.

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Further investment opportunities:

> Roland does not own shares in any of the companies mentioned in this article.

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Comments

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AGKCommsDir 07 Nov 2012 , 5:53pm

As director of communications at Aggreko Plc (LON:AGK), I would like to clarify some recent discussion about our company on Motley Fool.

In our stock exchange statement (http://ir.aggreko.com/investors/financial-releases/2012/2012-19-10.aspx ), we said that “we expect …. factors will impact our anticipated profits for the year by about 2.5%” this is a 2.5% drop in expectations NOT “a 2.5% decline in profit [for] this year” as mentioned recently in Motley Fool.

Before the announcement the publicly available consensus full year forecast profit before tax for Aggreko for 2012 was broadly £375million. The RNS statement says that it will be ~2.5% lower than expectations NOT that Aggreko’s profits will be down 2.5% (FYI Aggreko’s profit before tax and amortisation in 2011 was ~£330million pounds).

I think you will agree that this is an important and noteworthy difference.

Hope this clarifies things

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