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Is IMI plc (IMI) 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.

IMI plc (IMI)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 engineering group IMI plc (LON:IMI), one of the smaller companies in the FTSE 100.

IMI vs. FTSE 100
Let’s start with a look at how IMI has performed against the FTSE 100 over the last 10 years:

Total Returns 2008 2009 2010 2011 2012 10-Yr. Trailing Avg.
IMI -25.7% 98.4% 86.5% -16.6% 48.4% 20.2%
FTSE 100 -28.3% 27.3% 12.6% -2.2% 10% 10%

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.)

IMI plc (LON:IMI)’s meteoric growth over the last decade earned it promotion into the FTSE 100 in 2010 and means that shareholders have enjoyed an average annual return of twice the FTSE 100 average over the last 10 years — not bad for a company that specializes in “the precise control and movement of fluids”! So does IMI 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 IMI shapes up:

Item Value
Year founded 1862*
Market cap 4.3 billion pounds
Net debt 117 million pounds
Dividend Yield 2.4%
5-Year Average Financials
Operating margin 13.5%
Interest cover 14.0x
EPS growth 15.6%
Dividend growth 10%
Dividend cover 2.1x

*The company that became IMI was founded in 1862, but from 1927-1966, it was part of ICI, which it helped found.

Here’s how I’ve scored IMI on each of these criteria:

Criteria Comment Score
Longevity A long and respectable heritage. 5/5
Performance vs. FTSE Outstanding. 5/5
Financial strength Low debt, strong cash generation, but a big pension deficit. 3/5
EPS growth Strong earnings growth is expected to continue. 4/5
Dividend growth Decent growth with no cuts in more than 20 years. 4/5
Total: 21/25

Unlike many British engineering businesses, IMI plc (LON:IMI) has survived and prospered for more than 150 years. Although the nature of its business has changed several times over the years — until the 1990s, its main area of expertise was metals — this isn’t unusual for successful engineering businesses, which tend to be driven by a combination of scientific discovery and economic necessity.

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