The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that have the potential to beat the FTSE 100 over the long term, and should 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 building materials and supplies firm Travis Perkins (LSE: TPK), which was promoted into the FTSE 100 in the index’s most recent reshuffle.
Travis Perkins vs FTSE 100
Let’s start with a look at how Travis Perkins has performed against the FTSE 100 over the last 10 years:
| Total Returns | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 YTD | 10 yr trailing avg |
|---|---|---|---|---|---|---|---|
| Travis Perkins | -67.0% | 150.6% | 24.8% | -23.3% | 39.5% | 49.6% | 4.6% |
| FTSE 100 | -28.3% | 27.3% | 12.6% | -2.2% | 10.0% | 13.6% | 8.6% |
Source: Morningstar
(Total return includes both changes to the share price and reinvested dividends.)
Travis Perkins’ has underperformed the FTSE 100 over the last ten years, but has delivered an average annual total return of 26.4% over the last five years. This eclipses the 6.8% annual total return provided by the FTSE over the same period, and highlights the importance of buying good firms at low valuations.
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 Travis Perkins shapes up:
| Item | Value |
|---|---|
| Year founded | 1988* |
| Market cap | £3.74bn |
| Net debt | £452m |
| Dividend Yield | 1.7% |
| 5 year average financials | |
| Operating margin | 6.7% |
| Interest cover | 8.1x |
| EPS growth | 2.4% |
| Dividend growth | -6.7% |
| Dividend cover | 5.3x |
*Travis Perkins was formed when Travis & Arnold merged with Sandell Perkins in 1988, but Travis & Arnold had been in business since 1899.
Here’s how I’ve scored Travis Perkins on each of these criteria:
| Criteria | Comment | Score |
|---|---|---|
| Longevity | The firm’s roots go back more than a century. | 4/5 |
| Performance vs. FTSE | Strong but cyclical performance. | 4/5 |
| Financial strength | Modest gearing and strong cash flow. | 4/5 |
| EPS growth | Earnings are close to pre-recession levels. | 4/5 |
| Dividend growth | The dividend was suspended in 2009 and the yield is below average. | 3/5 |
| Total: 19/25 | ||
Travis Perkins’ score of 19/25 highlights the long-term durability of this business, which should continue to prosper through economic cycles and housing downturns.
The cyclical nature of the Travis Perkins’ business means that its share price is closely linked to the health of the construction industry, but Travis’ broad group of brands — it owns Wickes, Keyline and a number of tool, plumbing, heating and kitchen supply businesses — means that it should be able to weather most economic storms.
My verdict
Travis Perkins is a good company that could make an attractive retirement share. However, the firm’s shares currently trade on around 15 times 2012 earnings, which looks fully valued to me, and its 2.0% prospective yield isn’t that tempting.
Overall, I think Travis Perkins is a hold at its current price, but may be worth another look if the market dips later this year.
2013’s top income stock?
The utility sector is known for its reliable, above-average dividends, but the Motley Fool’s team of analysts has identified one FTSE 100 utility that they believe offers a particularly high-quality income opportunity.
The company in question offers a 5.7% prospective yield, and the Fool’s analysts believe that it could be worth up to 850p per share — a potential 15% gain on the current share price of around 740p.
If you’d like to know more, click here to download your free copy of the team’s exclusive report, while it’s still available.
> Roland does not own shares in Travis Perkins.