Is G4S the Ultimate Retirement Share?

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LONDON -- 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 that things will improve any time soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way to protect yourself from the downturn, however, is to build 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 U.K. large caps that have the potential to beat the FTSE 100 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 G4S (ISE: GFS.L) , the security outsourcing giant that is currently in the headlines over its failure to provide enough security guards for the Olympics. Is this a rare lapse from a well-run company, or is there trouble brewing?

The FTSE's biggest employer
G4S is the biggest employer on the London Stock Exchange, with more than 650,000 employees -- making its Olympic problems all the more surprising. It has outperformed the FTSE 100 on a total-return basis for four of the last five years, suggesting a history of strong earnings growth:

 

2007

2008

2009

2010

2011

Trailing 5-Year Average

G4S Total Return

32.7%

(13.6%)

30.4%

0.6%

10.0%

4.7%

FTSE 100 Total Return

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

0.4%

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.

I normally look at the company's trailing 10-year average and compare it to the FTSE 100, but G4S has only existed in its present form since 2004, so I've had to use the five-year figure, which shows that in recent years, G4S has outperformed the Footsie.

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 G4S shapes up:

The basics

Year Founded2004*
Market Cap3.4 billion pounds
Net Debt1.8 billion pounds
Dividend Yield3.6%

Sources: Morningstar; Digital Look. *G4S was formed when Group 4 Falck merged with Securicor in July 2004.

Five-year average financials

Operating Margin5.5%
Interest Cover3.7 times
EPS Growth8.2%
Dividend Growth15.9%
Dividend Cover2.2 times

Sources: Morningstar; Digital Look.

Here's how I've scored G4S on each of these criteria:

Criterion

Comment

Score (out of 5)

Longevity

A 77-year history of corporate evolution, but only eight in its current form.

3

Performance vs. FTSE

G4S has generally outperformed the FTSE 100 since its 2004 listing, but that's a relatively short period to judge by.

3

Financial Strength

G4S has low margins and quite high debt, reflecting tough competition and high costs.

2

EPS Growth

Earnings growth has been strong but may be beginning to slow.

3

Dividend Growth

G4S has increased its dividend every year since it listed on the LSE, and its annual average increase is well above inflation.

4

 

 

Total: 15/25

A score of 15/25 is pretty average and suggests that while G4S could be a candidate for a retirement fund portfolio, it does have some weaknesses, which brings me to my next tip.

Expert selections
One way to identify great dividend-paying shares is to study the choices of successful professional investors. One of the most successful 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 stock picks have outperformed the wider index by a staggering 305% over the last 15 years.

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:

At the time this article was published Roland does not own shares in G4S. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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