Here’s how I’ve scored Intertek on each of these criteria:
| Criteria | Comment | Score |
|---|---|---|
| Longevity | Intertek’s component parts are much older than its corporate structure, which only dates from 1996. | 3/5 |
| Performance vs. FTSE | Total returns 2.7 times the FTSE over the last ten years. | 5/5 |
| Financial strength | Consistent strong margins and plenty of free cash flow. | 4/5 |
| EPS growth | Earnings per share have risen by 150% over the last six years. | 5/5 |
| Dividend growth | Very strong and covered by free cash flow, but low yield. | 4/5 |
| Total: 21/25 | ||
Intertek Group was created when Inchcape’s testing services division was sold in a management buyout in 1987. The company was floated in 2002 and moved into the FTSE 100 in 2009. Many of the business’s component parts can trace their history back to the late 19th century, when the fields of electrical testing and marine surveying were growing rapidly.
Intertek’s activities span most major industries today and the group has 30,000 employees. The group’s earnings per share have risen by 150% over the last six years and operating profit is up by 180%. The company’s dividend credentials are impressive too — the annual payout has risen from 14.8p in 2006 to an expected payout of 40.7p for the 2012 financial year, a 175% pay rise for shareholders in six years!
The only fly in the ointment is the markets have already given Intertek shareholders ample rewards for the company’s success, driving up the share price by 279% in the last five years alone.
While this compares very favourably to the 10% gain delivered by the FTSE 100 over the same period, it does mean that Intertek’s shares trade on a price to earnings ratio of 26 times expected earnings for 2012. This means that Intertek’s dividend yield is just 1.1% — hardly a great starting point for a retirement income.
My Verdict
Intertek is clearly a high quality and successful company, but I feel that after such a long period of strong growth, it looks quite expensive. Given its present size, I expect that growth will slow and the company’s premium P/E could gradually reduce to the point where it offers a more attractive yield.
Despite this, there’s no doubt that Intertek’s business has a long pedigree and seems likely to enjoy a strong future — making it very suitable for a low-maintenance retirement portfolio.
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The article Is Intertek Group the Ultimate Retirement Share? originally appeared on Fool.com and is written by Roland Head.
Roland Head has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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