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 John Wood Group PLC (LON:WG), a global oil, gas and power services group that employs around 43,000 people in 50 countries.
John Wood Group vs. FTSE 100
Let’s start with a look at how John Wood Group PLC (LON:WG) has performed against the FTSE 100 over the last 10 years:
| Total Returns | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 YTD | 10 yr trailing avg |
| John Wood Group | (55.6%) | 67.3% | 83.1% | (9.6%) | 14.9% | 19.3% | 15.5% |
| FTSE 100 | (28.3%) | 27.3% | 12.6% | (2.2%) | 10% | 9.9% | 8.8% |
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.
John Wood Group PLC (LON:WG)’s strong 10-year average total return is reassuring and its dividend payments have also risen steadily in recent years, but the company is vulnerable to shifts in the price of oil and gas and has quite volatile profits — so is it a potential 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 Wood Group shapes up:
| Item | Value |
| Year founded | 1912 |
| Market cap | £3.0bn |
| Net debt | $154.5m |
| Dividend Yield | 1.7% |
| 5 year average financials | |
| Operating margin | 5% |
| Interest cover | 17.6x |
| EPS growth | 9.1% |
| Dividend growth | 13.6% |
| Dividend cover | 13.7x |
Here’s how I’ve scored John Wood Group PLC (LON:WG) on each of these criteria:
| Criteria | Comment | Score |
| Longevity | The company has adapted and survived for over 100 years. | 5/5 |
| Performance vs. FTSE | Wood Group has beaten the FTSE for over 6 years. | 4/5 |
| Financial strength | Moderate debt levels but fairly tight margins. | 4/5 |
| EPS growth | Upward trend, but earnings have been volatile. | 3/5 |
| Dividend growth | Solid growth since 2005. | 3/5 |
| Total: 19/25 |
Wood Group has grown strongly over the last five years and shareholder returns were boosted in 2011 by a £1.1 billion return of cash, following the sale of the company’s Well Support division to GE. The scheme was executed through a tender offer, rather than a special dividend, but shareholders participating in the scheme will have seen a substantial cash return in addition to their regular dividend payments.
However, despite a 5-year average dividend growth rate of 13.6%, John Wood Group PLC (LON:WG)’s forecast dividend yield of 1.7% is far lower than that of its sector peers Amec, which offers a prospective yield of 4.1%, and Petrofac, which offers a potential 3.6% yield. All three companies trade on similar forward price to earnings (P/E) ratios and are of a similar size, making Wood Group less attractive as a potential retirement share, despite its strong performance history.
My verdict
Wood Group is a high quality company with a strong track record of profitable growth. However, as a retirement share, it would provide a dividend income substantially below its sector average, making it look relatively expensive compared to Amec and Petrofac, its two main U.K.-listed peers. Both of these companies also have net cash positions, which compare favourably to John Wood Group PLC (LON:WG)’s $154 million net debt.
Finally, if you’re interested in investing in an oil services company as part of a diversified retirement portfolio, you should remember that these companies would be vulnerable to a sustained drop in oil prices, so their performance is likely to be correlated with that of oil supermajors such as Royal Dutch Shell and BP.
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The article Is John Wood Group the Ultimate Retirement Share? originally appeared on Fool.com and is written by Roland Head.
Roland Head owns shares in Royal Dutch Shell and BP, but does not own shares in any of the other companies mentioned in this article. The Motley Fool has no position in any of the stocks mentioned.
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