By 2035 almost a quarter of the UK will be over 65, with the over 85 bracket swelling to 2.9m. That’s not just a trend in the UK either. Globally, the number of over 60s is growing faster than any other age group.
Companies that service retirees are going to see their market grow substantially for years to come. Retirement is an opportunity.
Yields are variable and aren’t a reliable indicator of future income, and all investments fall as well as rise in value, so you could get back less than you invest. All information correct as at 16 August 2018.
Carnival cruises – a rising tide lifts all boats, but the biggest most of all
Now just to be clear, we’re not suggesting cruises only appeal to the over 60s. An industry report last year found the average age of cruise passengers is only 55. But cruising has an obvious appeal for older customers, and the 70+ age group saw the highest increase in passenger numbers between 2016 and 2017.
For an investor, the worry is that growth means building new ships, and existing ships need to be regularly refurbished or replaced.
Carnival spent $1.4bn on new ships in 2017 alone, and is committed to a further $15.3bn by 2022. That kind of spending soaks up cash, and means debt’s always going to be meaningful.
This increases the risks when purse strings are tightened. While passenger numbers have historically held up well in downturns, that’s been at the expense of ticket prices. Whether prices are high or low, interest on debt and ship maintenance costs still have to be paid.
Carnival - passenger numbers and average ticket prices
Source: Carnival annual reports
While the group offers a prospective yield of 3.4% now, investors should remember it hasn’t always proven reliable in the past.
But there are reasons for optimism. People are spending more on experiences than material objects, and that should be a tailwind. With cruise price rises lagging that of hotels, cruising could benefit more than most.
As the world’s biggest cruise company, carrying nearly half of all cruise passengers worldwide, Carnival is best placed to benefit from sector wide trends. Ten brands cater to a wide range of customers - from super swanky Cunard ships like the Queen Mary 2, to more affordable brands like P&O.
Scale also allows the group to keep a firm handle on operating costs, cutting $100m last year, and has allowed the company to explore new ventures, like launching the first cruise ship tailor made for the Chinese market.
Cruising has always been a business where size matters, and you don’t get bigger than Carnival.
Zimmer Biomet – still hip and in the frame
An unfortunate side effect of getting older is bits and pieces start to wear out. Joints get a particularly rough ride, and replacing or repairing them is increasingly common. There are roughly 160,000 hip and knee replacements every year in the UK alone.
That puts Zimmer Biomet firmly in the frame for investors looking to invest in an ageing population. The US group’s hip and knee replacements generated sales of $4.6bn last year – accounting for 59% of total sales – and it’s also got strong positions in elbow, foot and ankle, dental and spinal surgery.
The company went through a bit of a rough patch last year, with sales slipping as problems in the supply chain hit some high-demand products.
Those headwinds mean the shares are trading on a valuation comfortably below rivals. Results in 2018 have been encouraging so far, although extra costs associated with last year’s manufacturing issues will hold back profit growth for some time yet.
Operating margins are still impressive, comfortably in the high twenties, and favourable demographics should lend a helping hand over time. The number of UK hip, knee, elbow, shoulder and ankle replacements rose over 8% between 2016 and 2017, and emerging Asian economies are already a rapidly growing source of sales. Neither of those trends looks likely to end soon.
Zimmer Biomet - Asia Pacific sales ($m)
Past performance isn’t a guide to future returns. Source: Zimmer Biotech annual reports
The prospective dividend is a fairly paltry 0.8%, and with plenty of work still to be done, Zimmer is definitely one for the long term. But if management can recover momentum and capitalise on the growth potential, investors could leave with a spring in their step.
Legal & General – an interest in savings
Longer retirements make saving for old age more important than ever. Good news for life insurers and asset managers.
Legal & General has fingers in both pies – which is one of the reasons we think it’s particularly well-placed.
It’s a market leader in popular, low cost tracking funds, with £326bn under management. Meanwhile pension auto-enrolment has seen L&G become the UK's biggest pension manager outside of final salary (or DB) schemes.
L&G also buys out and manages pension schemes for other companies. Demand for that service has been strong and we expect that to continue as companies look to de-risk existing final salary schemes. The UK market alone is worth around $2trn.
Although the UK is still L&G's centre of gravity, international expansion should create more opportunities. International flows accounted for 82.5% of new money in the asset management business in 2017, while the US DB market is significantly larger than the UK.
L&G’s lifetime mortgages business has grown hugely of late – from nothing to £1bn a year in just three years. Freeing up cash trapped in property has obvious benefits for those in retirement, but it’s still a new business, and new businesses can create unexpected surprises. It’s worth keeping a close eye on.
There are other potential pitfalls ahead too. A messy Brexit presents a risk, while the company’s very exposed to the wider stock market too. That means dramatic falls in share prices would impact short-term results.
Still, we think a combination of attractive end markets and a strong capital position makes L&G well-placed for the long term. In the meantime, its recurring revenues helps to underpin a 6.8% prospective yield.
Dividend Per Share (GBp)
Past performance isn’t a guide to future returns. Source: Thomson Reuters Eikon 16/08/18
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
Nicholas Hyett, Equity Analyst, owns shares in Legal & General plc.
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