Is William Hill plc The Ultimate Retirement Share?
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 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.
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 (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at the FTSE 100's newest member, William Hill (LSE: WMH), which was promoted into the blue chip index to fill the vacancy created by Xstrata's merger with Glencore International.
William Hill vs. FTSE 100
Let's start with a look at how bookmaker and internet gambling operator William Hill has performed against the FTSE 100 over the last 10 years:
Total Returns | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 YTD | 10 yr trailing avg |
|---|---|---|---|---|---|---|---|
William Hill | -52.8% | -12.5% | -4.0% | 23.9% | 76.6% | 24.6% | 9.8% |
FTSE 100 | -28.3% | 27.3% | 12.6% | -2.2% | 10.0% | 10.5% | 9.1% |
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.)
William Hill's 10-year average trailing total return just edges ahead of the FTSE 100, but when dividends are excluded, shareholders who bought between 2004 and 2007 may still be underwater, highlighting how dividends can soften the impact of share price volatility. Given this, does William Hill have the makings of a great retirement share?
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 William Hill shapes up:
Item | Value |
|---|---|
Year founded | 1934 |
Market cap | £3.7bn |
Net debt | £742m |
Dividend Yield | 2.6% |
Operating margin | 22.9% |
Interest cover | 8.5x |
EPS growth | -3.2% |
Dividend growth | -7.4% |
Dividend cover | 3.7x |
Here's how I've scored William Hill on each of these criteria:
Criteria | Comment | Score |
|---|---|---|
Longevity | 79 years isn't bad going. | 4/5 |
Performance vs. FTSE | Just ahead of the index. | 4/5 |
Financial strength | Fairly solid. | 4/5 |
EPS growth | Decent growth since 2009. | 4/5 |
Dividend growth | Recovering steadily. | 3/5 |
Total: 19/25 | ||
William Hill's dividend was slashed by 66% in 2008, as the firm prepared itself for a poor 2009. However, plenty of other reputable businesses were in the same boat and not all have made such good progress in rebuilding their dividends as William Hill, whose payout has risen from 5.5p in 2008 to 11.2p in 2012 -- a 103% increase.
High street betting shops have always been the core of William Hill's business, but a lot of sports betting and casino-style gambling now takes place online in the UK, and William Hill's online division has grown strongly to reflect this. William Hill Online delivered a 36% increase in operating profits to £145m last year, and this year's results should be boosted by the firm's recent acquisition of a 29% minority share in its online division, previously held by the firm's technology partner, Playtech.
My verdict
In 79 years of business, William Hill has demonstrated its ability to adapt to changing fashions and technologies in British gambling. Although the firm's shares look a little expensive for my taste at the moment -- with a price to earnings ratio of 17 and a dividend yield of around 2.6% -- they are not outrageously priced, given the firm's likely earnings growth this year.
I think that William Hill could be a solid retirement share, and while the twin risks of regulatory and technological change could threaten its business at some point in the future, I don't think this is especially likely. Gambling generates valuable tax revenues, and William Hill has already negotiated several technological revolutions -- so I see no reason why it cannot continue to do so.
The best FTSE 100 dividends?
Dividend prospects for William Hill shareholders are positive, but the firm's yield is below average and it doesn't have a long history of consistent increases -- two possible reasons that the firm failed to make it into The Motley Fool's latest special report, "5 Shares To Retire On".
The Fool's in-house experts recently crunched the numbers on every company in the FTSE 100 and identified five of the best blue chip dividend shares in the UK. I believe that this should be essential reading for anyone aiming to build a diversified, income portfolio for their retirement.
If you would like to know more, click here now to download your copy of this report -- it's free, but availability is strictly limited, so don't delay.
