Is The Weir Group PLC (WEIR) the Ultimate Retirement Share?

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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.

The Weir Group PLC (LON:WEIR)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 engineer The Weir Group PLC (LON:WEIR), whose main business is producing pumps and related equipment for the oil and mining industries.

The Weir Group PLC (LON:WEIR) vs. FTSE 100
Let’s start with a look at how The Weir Group PLC (LON:WEIR) has performed against the FTSE 100 over the last 10 years:

Total Returns 2008 2009 2010 2011 2012 10 yr trailing avg
Weir Group -59.6% 137.5% 151.2% 15.7% -5.9% 29.9%
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.)

The commodities supercycle helped The Weir Group PLC (LON:WEIR) to deliver total returns of more than 100% in two years out of the last five — a truly outstanding record, but one that will be hard, if not impossible, to maintain. So how does this engineering firm look as a long-term retirement holding?

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 The Weir Group PLC (LON:WEIR) shapes up:

Item Value
Year founded 1871
Market cap £5.1bn
Net debt £689m
Dividend Yield 1.6%
5-year average financials
Operating margin 16.6%
Interest cover 25x
EPS growth 31.4%
Dividend growth 18.2%
Dividend cover 3.4x

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

Criteria Comment Score
Longevity Weir’s 142-year heritage is impressive. 5/5
Performance vs. FTSE Exceptional. 5/5
Financial strength Moderate debt and strong cash flows. 4/5
EPS growth Good earnings growth 4/5
Dividend growth Good growth but low yield. 3/5
Total: 21/25

Between March 2007 and the end of 2012, The Weir Group PLC (LON:WEIR)’s operating profit margin rose from 11% to 18.5%, its annual revenues climbed by 150% and its share price by rose by 236%. Although the business has been a big beneficiary of the recent booms in mining and oil and gas production, the company’s management deserves some credit, too, as they have fully exploited this once-in-a-generation opportunity.

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