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 International Consolidated Airlines Group (LSE: IAG), the strangely-named company that operates British Airways and Spain's troubled Iberia airline. IAG released its final results this week, showing that British Airways' profits were cancelled out by Iberia's losses -- so can IAG's management turn Iberia around to deliver sustainable, long-term growth?
International Consolidated Airlines vs. FTSE 100
Let's start with a look at how IAG has performed against the FTSE 100 since it was formed in January 2011 through the merger of British Airways, Iberia and, more recently, bmi:
|Total Returns||2011||2012||2013 YTD||3 yr. trailing avg.|
|International Consolidated Airlines||-45.9%||25.4%||29.4%||4.2%|
(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.)
IAG's stock market performance since its creation has been fairly unimpressive, and yesterday the group reported a pre-tax loss of EUR997m for 2012. Another loss seems likely in 2013, as the group faces the exceptional costs and likely disruption from strike action involved in restructuring loss-making Iberia. Despite this, IAG's shares have performed strongly so far this year, as analysts have upgraded their expectations for IAG, thanks to the success it has had in integrating bmi into a restructured and profitable British Airways.
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 IAG shapes up:
|3 year average financials|
Here's how I've scored IAG on each of these criteria:
|Longevity||A difficult marriage that may yet fail.||1/5|
|Performance vs. FTSE||Below average, but too early to really judge.||2/5|
|Financial strength||Despite this year's losses, it's fairly robust.||3/5|
|EPS growth||Not much growth yet.||1/5|
|Dividend growth||Doesn't yet pay a dividend.||0/5|
IAG currently has the dubious distinction of being one of just three companies in the FTSE 100 that doesn't pay a dividend -- the others being Royal Bank of Scotland and Lloyds. That's not a great start for a retirement share, but the company is a long-term project that should, perhaps next year, start to pay dividends. So for investors who are not retiring for many years yet, is it worth buying IAG stock now with a view to its future income potential?
I'm not so sure. The airline industry is said to have generated a negative return on investment over its whole history and British Airways' own recent history is spotted with loss-making years. If IAG chief executive Willie Walsh can turn IAG into a consistently profitable, dividend-paying company, he will have done a remarkably good job.
IAG's score of 7/25 is the lowest I have awarded so far in this series, which has now covered almost all of the FTSE 100! This doesn't necessarily make it the worst company in the FTSE 100, but it does suggest that it lacks the successful track record required for a good retirement share. IAG may yet turn out to be a superb success, or it may fail miserably, but there is not yet enough evidence either way -- and for a retirement portfolio, a good history of reliable performance and dividend payments is a key requirement. After all, your retirement portfolio may need to generate an income for you over several decades.
IAG might be an interesting investment, but it isn't a company I'd want to depend on for my retirement income, now, or in the future. It's definitely not a share for my retirement portfolio.
2013's top income stock?
One sector that does have an excellent reputation amongst retirement investors is the utility sector, which is known for its reliable, above-average dividends. The Motley Fool's team of analysts has recently identified one FTSE 100 utility share that they believe offers a particularly high-quality income opportunity.
The company in question offers a 5.7% dividend yield and the Fool's analysts believe that it could be worth up to 850p per share -- offering new investors a potential 20% gain on the current share price of around 700p.
Indeed, the Motley Fool's analysts are so confident in this share that they've named their report "The Motley Fool's Top Income Stock For 2013"! This exclusive new report is completely free, but will only be available for a limited time -- so click here to download your copy now.