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 things will improve 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 to protect yourself from the downturn, however, is to build 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 global plumbing-supplies firm Wolseley  , whose U.K. brands include Plumb Center and Parts Center.

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

 

2008

2009

2010

2011

2012

10-Year Trailing Average

Wolseley Total Return

(46.7%)

(67.5%)

64.1%

6.4%

40.3%

(1%)

FTSE 100 Total Return

(28.3%)

27.3%

12.6%

(2.2%)

10%

9.2%

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.

As you would expect, Wolseley was hit hard by the U.S. and U.K. housing crashes and missed out on the general stock-market recovery in 2009, when it was forced to resort to a 1 billion pound rights issue to shore up its finances. However, the company slashed costs and restructured its operations and has since recovered strongly, outperforming the market by a big margin over the last three years.

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 Wolseley shapes up:

The basics

Year Founded

1887

Market Cap

8 billion pounds

Net Debt

27 million pounds

Dividend Yield

2%

Five-year average financials

Operating Margin

3.6%

Interest Cover

9.6 times

EPS Growth

8.9%

Dividend Growth

49%

Dividend Cover

4.6 times

Source: Morningstar, Digital Look, Wolseley.

Here's how I've scored Wolseley on each of these criteria:

Criterion

Comment

Score (out of 5)

Longevity

125 years in business.

5

Performance vs. FTSE

Wolseley has fallen behind the index over the last 10 years.

2

Financial Strength

Gearing has fallen, and margins have risen over the last five years.

4

EPS Growth

Earnings growth has helped a return to profitability.

4

Dividend Growth

No payouts in 2008 or 2009, but a strong recovery since.

3

 

 

Total: 18/25

Wolseley's business is heavily cyclical, and some of its recovery has been driven by a return to more healthy trading conditions in the U.S. and Canada, which accounted for 57% of revenue and 70% of trading profit in the first quarter of the current financial year. The company continues to see stagnant performance in the U.K. and declines in the Nordic region, France, and Central Europe, which collectively account for a shrinking proportion of the company's profits.

Despite this, Wolseley has a long and respectable history, during which it has transformed itself from one of the first British car manufacturers into a global plumbing and heating supplies business with a strong presence in the U.S. oil and gas industry and in homebuilding markets. Its self-help measures over the last five years have delivered impressive results: The company has disposed of loss-making operations, repaid its debt, repaired damaged profit margins, and even managed to fund a 350 million pound cash return to shareholders.

My concern is that Wolseley has become heavily reliant on the North American market -- in particular the additional growth provided by the shale oil and gas sector. The proportion of profit provided by its U.S. and Canadian operations is rising, while the company's other markets, including the U.K., are failing to pull their weight. If the U.S. recovery falters, Wolseley could be hit hard once more.

My verdict
Wolseley's inability to pay a dividend for two years out of the last five reduces its appeal as a retirement share. Although the global financial crisis was unusually severe, many companies were able to continue paying dividends throughout this period, and for me, reliability is a key attribute of a retirement share.

On the other hand, Wolseley has a long pedigree, and I suspect it will continue to survive and thrive over the next few decades. Whether this appeal outweighs the risk of future disruption to the dividend is a decision only you can make. One thing I am sure of, however, is that I would not choose to buy Wolseley shares at their current valuation; in my view, the company's growth prospects would have to be stronger to justify its current price-to-earnings ratio of 17.5 and its 2% dividend yield.

Top income picks
Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors.

One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's High Income fund grew by 342% in the 15 years to Oct. 31, 2012, during which time the FTSE All-Share index managed a gain of only 125%. You can learn about Neil Woodford's top holdings and how he generates such fantastic returns in this free Motley Fool report. I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

The article Is Wolseley the Ultimate Retirement Share? originally appeared on Fool.com.

Roland does not own shares in Wolseley. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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