Is SABMiller the Ultimate Retirement Share?
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 (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 SABMiller (ISE: SAB.L) , the South African brewing giant with a global footprint and ownership of brands including Peroni Nastro Azzurro, Grolsch, and Miller Genuine Draft.
I'll have a lager
SABMiller's main product is lager, the market for which is expanding rapidly, thanks to the world's emerging economies. Over the last 10 years, SABMiller has beaten the FTSE 100 hands-down:
Total Return | 2007 | 2008 | 2009 | 2010 | 2011 | Trailing 10-Year Avg. |
|---|---|---|---|---|---|---|
SABMiller | 22.7% | (15.6%) | 60.4% | 26.1% | 2.7% | 21.3% |
FTSE 100 | 7.4% | (28.3%) | 27.3% | 12.6% | (2.2%) | 6.9% |
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.
SABMiller's spectacular outperformance has been the result of acquisitions and organic growth in many of its markets, especially South America and Africa, where it has very high market shares. As a sin stock, it is quite defensive and performs strongly even in downturns; unlike pub companies, SABMiller makes money whether people buy their beer at supermarkets or in pubs and bars.
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 SABMiller shapes up:
Item | Value |
|---|---|
Year founded | 1895 |
Market cap | 45 billion pounds |
Net debt | 11.6 billion pounds |
Dividend Yield | 2.1% |
Five-year average financials | |
Operating margin | 17.6% |
Interest cover | 6.0 times |
EPS growth | 27% |
Dividend growth | 17.0% |
Dividend cover | 2.6 times |
Source: Morningstar, Digital Look, SABMiller.
Here's how I've scored SABMiller on each of these criteria:
Criteria | Comment | Score |
|---|---|---|
Longevity | SAB's original beer, Castle Lager, remains a market leader 117 years later. | 5/5 |
Performance vs. FTSE | Outstanding, but the shares are expensive. | 4/5 |
Financial strength | High, stable, and expanding profit margins balance its gearing. | 4/5 |
EPS growth | Impressive earnings growth has fueled its highly rated share price. | 4/5 |
Dividend growth | Good growth, slightly conservative payout ratio. | 4/5 |
Total: 21/25 | ||
SABMiller's score of 21/25 suggests that it could be an excellent candidate for a retirement fund portfolio -- and I agree. My main concerns are that SAB's prolonged high performance has made its shares expensive and low yielding, with a current price-to-earnings ratio of 20 and a yield of just 2.1%. In the long term, I don't think this matters, as earnings and thus yield should continue to grow, even if the share price is re-rated to a lower P/E. However, in the shorter term, SABMiller does not offer great value as a source of income.
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 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.
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Further investment opportunities:
The article Is SABMiller the Ultimate Retirement Share? originally appeared on Fool.com.
Roland does not own shares in SABMiller. 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.
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