Is Old Mutual The Ultimate Retirement Share?

Published in Company Comment on 29 November 2012

Will shares in Old Mutual (LSE: OML) 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 Old Mutual (LSE: OML) (OTC: ODMTY.US), the life insurance and investment company with a South African heritage.

Old Mutual vs. FTSE 100

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

Total Returns2007200820092010201110 yr trailing avg
Old Mutual-0.1%-63.0%98.5%15.1%39.2%10.3%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%7.1%

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.)

Old Mutual's 10-year average trailing total return of 10.3% beats the FTSE 100's 7.1% and suggests that the company was well managed as it came out of the 2008 crash, as it has delivered a strong recovery. Old Mutual's performance this year has been impressive too, with year-to-date total returns of 28.1%, four times greater than the 7.3% delivered by the FTSE 100 total return index.

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 Old Mutual shapes up:

Year founded1845
Market cap£8.4bn
Net debt (cash)(£3,624)
Dividend Yield2.9%
5 year average financials
Operating margin84.0%
Interest covern/a
EPS growth (adjusted)-9.4%
Dividend growth12.3%
Dividend cover4.3x

Source: Morningstar, Digital Look, Old Mutual

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

Longevity167 years in the same business is impressive.5/5
Performance vs. FTSEA strong performer despite the financial crisis.4/5
Financial strengthA heavy emphasis on debt repayment is paying dividends.4/5
EPS growthEPS has just returning to pre-crisis levels.3/5
Dividend growthDespite strong growth, dividends remain below 2007 levels.3/5
Total: 19/25

Old Mutual's score of 19/25 reflects its underlying strength and impressive recovery from the financial crisis. But this can't disguise the brutal cuts made to its dividend in 2008 and the fact that earnings per share remain below 2007 levels.

At the same time, it could be argued that the business is leaner and more robust than it was five years ago -- but for me, its biggest attraction is that it offers strong exposure to the African market, something that is hard to come by if you invest in big cap FTSE 100 shares. Old Mutual was founded in South Africa and remains the biggest life insurer in Africa. It has operations in Nigeria, Zimbabwe and Botswana and is intent on continuing its African expansion.

While Africa isn't without risk for investors, it is home to an increasing number of resource-rich emerging markets, with rapidly-growing middle classes -- all of whom will need life insurance sooner or later. In addition, Old Mutual's experience in Africa is second to none in the FTSE 100, and it must rate as one of the safest ways for investors to access this key region. Old Mutual's 2.9% dividend is slightly below the FTSE 100 average of 3.3% and isn't ideal for a retirement investment, but the company trades on an attractive price-to-earnings ratio of just 9.9 times this year's forecast earnings and could prove a successful investment for the future. Analysts are expecting this year's total dividend to be 23% higher than last year's, and Old Mutual's shares trade on a much more attractive forward yield of 3.6%.

I'm pretty certain that by the time I retire, Africa will be a very different and more developed market than it is now. An investment in its development through the relatively safe medium of a FTSE 100 company could be an astute retirement investment and deliver an attractive income in future years.

Top income picks

If you are retiring relatively soon and Old Mutual's 2.9% dividend income just isn't enough for you, then you may want to consider the choices of successful professional income 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 High Income fund grew by 342% in the 15 years to June 2012, during which time the FTSE All-Share index managed a gain of only 125%.

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 Old Mutual.

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