Is Tesco 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 of things improving anytime 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 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 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 Tesco (ISE: TSCO.L) , the U.K.'s largest supermarket chain and a company that divides many professional investors and Fools, some of whom prefer J Sainsbury and Wm Morrison Supermarkets.

Is Tesco best?
Tesco has had a well-publicized downturn this year, but over the last 10 years it has beaten the FTSE 100 fairly consistently on a total returns basis:

Total Return

2007

2008

2009

2010

2011

Trailing 10-Yr. Avg.

Tesco

20.5%

(22.2%)

22.3%

2.5%

(1.6%)

7.9%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.5%

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.

Tesco's returns have been more stable and resilient than the FTSE 100 as a whole in recent years, demonstrating its defensive qualities: People don't stop buying groceries in a recession, and supermarkets are the cheapest places to buy alcohol.

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 Tesco shapes up:

Item

Value

Year founded

1919

Market cap

25 billion pounds

Net debt

9.4 billion pounds

Dividend yield

4.6%

5-year average financials

 

Operating margin

5.02%

Interest cover

6.8 times

EPS growth

9.6%

Dividend growth

10.6%

Dividend cover

2.22 times

Sources: Morningstar, Digital Look, Tesco PLC.

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

Criteria

Comment

Score

Longevity

No complaints -- approaching 100 years of continuous operation.

5/5

Performance vs. FTSE

Has a history of outperforming the FTSE 100.

4/5

Financial strength

Generally a stable, cash-generative business, but overspending on new stores has resulted in negative cash flow.

3/5

EPS growth

Solid growth, with high margins from growing Tesco Bank business.

4/5

Dividend growth

Very consistent and closely aligned to average earnings growth -- what's not to like?

5/5

  

Total: 21/25

A score of 21/25 is the best yet and suggests that Tesco would make an excellent candidate for a retirement fund portfolio. The company is focused on getting its U.K. business back on track, and its current share price weakness could be seen as an excellent buying opportunity for a long-term hold.

Expert selections
One way of identifying great dividend-paying shares is to study 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 have outperformed the wider index by a staggering 305% over the last 15 years.

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.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

The article Is Tesco The Ultimate Retirement Share? originally appeared on Fool.com.

Roland Head owns shares in Tesco but does not own any of the other shares mentioned in this article.The Motley Fool owns shares of Tesco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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