LONDON -- The past five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign that 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 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 Whitbread , the company that runs U.K. hotel and restaurant chains including Costa Coffee, Premier Inn, and Brewers Fayre.

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

Total Returns2008200920102011201210-Year Trailing Average
Whitbread (31.9%) 57.9% 29.7% (9.8%) 59.9% 24.2%
FTSE 100 (28.3%) 27.3% 12.6% (2.2%) 10% 10.2%

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.

Whitbread's 10-year average trailing total return is 2.4 times that of the FTSE 100, highlighting the strong shareholder returns this company has delivered over the past decade.

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 Whitbread shapes up:

ItemValue
Year founded 1720
Market cap 4.7 billion pounds
Net debt 525.8 million pounds
Dividend Yield 2.1%
5-Year Average Financials
Operating margin 17.5%
Interest cover 9.2x
EPS growth 11.1%
Dividend growth 11.1%
Dividend cover 2.8x

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

CriteriaCommentScore
Longevity One of the U.K.'s oldest companies. 5/5
Performance vs. FTSE Very strong. 5/5
Financial strength Decent margins moderate debt, although cash flow is tight. 4/5
EPS growth Steady and attractive. 4/5
Dividend growth Growth in line with earnings. 4/5
Total: 22/25

With nearly 300 years of operating history, Whitbread has an ability to evolve and adapt that isn't really in question, although it's worth noting that until 2001 it was primarily a brewer and pub operator. The company's management believes that hotels and restaurants offer superior growth prospects to pubs and beer, and the fact that Whitbread has delivered a 24.2% average annual return over the past 10 years suggests that they may be correct.

In Whitbread's latest trading statement, it reported another quarter of strong growth, especially for the Costa Coffee and Premier Inn businesses, both of which are expanding aggressively. Globally, Whitbread is on course to open 320 new Costa stores and 1,300 Costa Express units in the 2012/13 financial year, and it expects to have opened 4,300 new Premier Inn rooms in the U.K. during the same period.

This rapid growth fuelled a 32.2% rise in Costa sales in the 11 weeks to Feb. 14, along with a 14.1% rise in Premier Inn sales. Like-for-like sales rose, too, suggesting that at the moment, the company is meeting demand, rather than anticipating it. I do have some reservations about how far this growth can continue -- in recent years, we've seen Starbucks forced to scale back its growth ambitions -- and I wonder whether Costa and Whitbread might end up in the same boat, in a few years' time.

My verdict
Whitbread's growth has been good enough that its shares have doubled in value over the past five years, meaning that they currently trade at a price-to-earnings ratio of 17.5, based on this year's expected earnings. Although this isn't outrageous, it isn't cheap, either, and any disappointment could make the share price slip back to a more conservative rating. What's more, Whitbread's forward dividend yield of 2.4% is below the FTSE average and has only been covered by free cash flow twice in the past six years, because of heavy capital spending on expansion. This could make the dividend vulnerable if profits fall -- not ideal in a retirement share.

Overall, I think Whitbread's pedigree is impressive, but much of its growth potential is already factored into the price, reducing its appeal as a retirement share. In comparison, the company I mention below has delivered similar growth performance but currently has a much lower P/E rating, stronger cash flow, and a higher dividend yield, making it a more attractive option, in my view.

2013's top growth stock?
Discovering shares that can outperform the wider market over long periods isn't easy, but The Motley Fool's team of analysts have found one stock that they believe is worth far more than its current valuation.

The company in question outperformed the wider market by 32% in 2012 and has continued to move ahead of the FTSE 100 in 2013. It operates a number of businesses that are household names and has been very successful at profiting from an important new technology, unlike some of its peers.

All the details are available in this new free report: "The Motley Fool's Top Growth Stock for 2013," and if you would like to know more, I would strongly recommend you click here to download this report immediately -- it's completely free, but it will only be available for a limited time.

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

Roland Head has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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