Is GlaxoSmithKline the ultimate retirement share?

GlaxoSmithKlineThe 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 UK 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.%VIRTUAL-SkimlinksPromo%
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund.

Today, I'm going to take a look at GlaxoSmithKline, the UK's largest pharmaceutical company.

Performance enhancing drugs
GlaxoSmithKline's product range includes consumer brands such as Lucozade, Sensodyne and Nicorette, as well as its prescription drugs and vaccines. It's a classic defensive stock and has been far less volatile than the FTSE 100 over the last 5 years:

Total Return 2007 2008 2009 2010 2011 Trailing 10 yr avg.
GlaxoSmithKline -1.0% 4.8% 7.4% -1.2% 24.2% 4.0%
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.)

Although GSK's trailing 10 year average total return is below that of the FTSE 100, anyone holding GSK shares from 2007 until today would have seen a total return, including reinvested dividends, of 40%, compared to 12% for the FTSE 100 total return index.

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 GlaxoSmithKline shapes up:

Item Value 5 year average financials
Year founded 2000*
Market cap £74bn
Net debt £9.2bn
Dividend Yield 4.7%
Operating margin 28.7%
Interest cover 13.7x
EPS growth 33.8%
Dividend growth 7.8%
Dividend cover 1.7x

*GSK was the result of a series of mergers, the final one of which took place in 2000. The component companies are much older.
Source: Morningstar, Digital Look, GlaxoSmithKline
Here's how I've scored GlaxoSmithKline on each of these criteria:

Criteria Comment Score
Longevity A new company, but a long history with some major brands. 4/5
Performance vs. FTSE A strong, defensive performer. 4/5
Financial strength Quite heavily geared but high profit margins and ample cash. 4/5
EPS growth Inconsistent, but likely to be steady over the long term. 3/5
Dividend growth Above-inflation and stable dividend growth -- ideal for retirees. 4/5

Total: 19/25

A score of 19/25 is attractive in my view and makes GlaxoSmithKline and attractive candidate for a retirement fund portfolio -- indeed, I hold these shares in my own retirement fund.

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