Is Burberry The Ultimate Retirement Share?

Published in Company Comment on 27 November 2012

Will shares in Burberry Group (LSE: BRBY) 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 Burberry Group (LSE: BRBY), the upmarket fashion retailer whose share price has risen by122% over the last five years.

Burberry vs. FTSE 100

Let's start with a look at how Burberry has performed against the FTSE 100 over the last 10 years:

Total Returns2007200820092010201110 yr trailing avg
FTSE 1007.4%-28.3%27.3%12.6%-2.2%7.2%

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.)

Despite being hit hard at the start of the financial crisis, Burberry has bounced back strongly and over the last 10 years has delivered returns double those of the underlying index. This year has been decidedly shakier for the company -- Burberry's share price dropped sharply after it warned shareholders of slowing sales growth in September -- although the share price has since recovered well.

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 Burberry shapes up:

Year founded1856
Market cap£5.5bn
Net debt (cash)(£338m)
Dividend Yield2.0%
5 year average financials
Operating margin18.6%
Interest cover48.9x
EPS growth17.1%
Dividend growth22.2%
Dividend cover2.9x

Source: Morningstar, Digital Look, Burberry Group

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

LongevityThe Burberry label has a long pedigree5/5
Performance vs. FTSEThe last 10 years have been very strong.5/5
Financial strengthNet cash for several years, plus attractive margins.4/5
EPS growthRapid expansion has fuelled strong earnings growth.4/5
Dividend growthStrong growth but conservative payout as cash has fuelled expansion.4/5
Total: 22/25

A score of 22/25 is very impressive, and based on the numbers above, it might suggest that Burberry would be an excellent candidate for a retirement fund portfolio. However, I think that this is one case where these numbers tell a misleading story. Burberry's growth, profitability and net cash provide a clear indication that it is a successful company -- but its current price-to-earnings ratio (P/E) of around 20 and its 2% yield mean that that for me, it's definitely not a retirement share.

Burberry investors threw their toys out of the pram and forced the company's share price down by 20% in one day's trading back in September. For a FTSE 100 company, that's a very rare occurrence, and can only indicate two possible scenarios; a big-time growth share that's slowing down, or a major catastrophe on the scale of BP's Macondo disaster.

In Burberry's case, it wasn't a disaster; it was simply a quarterly sales update informing shareholders of 6% sales growth over the second quarter! This, combined with a warning from Burberry CEO Angela Ahrendts that "sales growth has slowed against historically high comparatives", was enough to send the share price plummeting. This is not the behaviour of a retirement share -- it's a growth story that is balanced on a high P/E which depends on continuous outperformance; something that will, eventually, slow down.

By way of a contrast, fashion retailer Next has delivered similar share price growth over the last ten years, but offers a higher yield and much higher earnings per share -- meaning that it trades on a far more attractive P/E of just 14. Next could well be a good retirement share -- and I plan to take a closer look at this high street name in a future article.

All of this doesn't detract from Burberry's success as a business -- and it's entirely possible that the ongoing expansion of its sales channels and product range will fuel a lot more growth. However, as retirement investors, adrenaline-fuelled growth isn't what we are looking for. Sometimes, a closer look at all the numbers is necessary, and this is one of those times.

Top income picks

One professional investor who always studies the numbers carefully is Neil Woodford, the City fund manager whose High Income fund grew by 342% in the 15 years to October 2012, during which time the FTSE All-Share index managed a gain of only 125%.

Mr. Woodford's long-running success has made him one of the most successful income investors currently working in the City and he manages more money for private investors than any other City manager -- £21bn at the end of October 2012.

You can learn about Neil Woodford's top holdings and how he generates such fantastic returns 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.

> Roland does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended Burberry.

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