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 TUI Travel , the travel company whose U.K.-focused brands include Thomson, Crystal Ski, and LateRooms.com.
TUI Travel vs. FTSE 100
Let's start with a look at how TUI Travel has performed against the FTSE 100 over the last 10 years:
10 yr trailing avg
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.)
TUI Travel's share price nearly doubled last year, helping it to an index-beating 10-year average total return of 16.1%. Prior to that, the firm's performance had been rather middling, as you might expect from a European travel company during a Europe-wide recession.
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 TUI Travel shapes up:
Market cap (billion pounds)
Net debt (million pounds)
5-year average financials
Here's how I've scored TUI Travel on each of these criteria:
Too early to say.
Performance vs. FTSE
Decent enough, so far.
Very little debt, but thin profit margins.
Earnings have improved post-recession.
The dividend has grown steadily.
TUI Travel was formed when First Choice and TUI Tourism merged in 2007. It's too early to say whether the company will prove to be a long-term survivor in its current form, and it's already been the subject of failed merger talks with TUI AG, the German company that was previously the parent of TUI Tourism. So far, TUI Travel's trading has been characterised by wafer-thin profit margins that have seen the company hover between profit and loss.
TUI's winter holiday business is a particular weakness, and in its most recent trading update, TUI confirmed that its winter losses had been reduced, but not eliminated, by the higher margins and improved average selling prices it had achieved this year. The company expects to deliver a full-year operating profit, thanks to strong summer sales, and TUI's 3.6% dividend yield was fully covered (just) by free cash flow last year. I do, however, have some concerns over the dividend's long-term safety.
TUI Travel's short and unproven history -- it has lost money in three of the last six years -- and its very low profit margins discourage me from adding it to my retirement portfolio. Although its dividend yield is slightly above the FTSE 100 average, and is reasonably well supported by cash flow, my concern is that, rather like the airline industry, the travel industry has to compete aggressively on price, and is not always able to pass on increased costs. I suspect that periodic losses and thin margins will always be a feature of TUI's business, and I reckon there are safer ways to earn a 3.5% yield.
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The article Is TUI Travel the Ultimate Retirement Share? originally appeared on Fool.com.
Roland Head does not own shares in TUI Travel. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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