Is Schroders the Ultimate Retirement Share?

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 of things improving 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 (UKX) 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 Schroders (LSE: SDR  ) , the global asset management company and fund manager.

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

Total Returns 2007 2008 2009 2010 2011 10-Yr. Trailing Avg.
Schroders 19% -31.7% 58.6% 41.9% -27.1% 13.5%
FTSE 100 7.4% -28.3% 27.3% 12.6% -2.2% 7.6%

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.)

Schroders has outperformed the FTSE 100 over the last five years, and its 10-year average trailing total return is considerably higher than that of the leading index, suggesting sustained strong performance. Schroders' shares are up by 24% so far this year, too -- so could this firm be a 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 Schroders shapes up:

Item Value
Year founded 1804
Market cap 3.7 billion pounds
Net debt (cash) (2.3 billion pounds)
Dividend Yield 2.4%
5-Year Average Financials
Operating margin 21.8%
Interest cover n/a
EPS growth 8.1%
Dividend growth 9.3%
Dividend cover 2.5x

Source: Morningstar, Reuters, Schroders.

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

Criteria Comment Score
Longevity More than two centuries in business. 5/5
Performance vs. FTSE Schroders has outperformed the index consistently. 4/5
Financial strength Strong margins, plenty of cash and a prudent dividend policy. 4/5
EPS growth Steady growth suggests a stable but growing business. 4/5
Dividend growth An attractive growth rate that's well above inflation, although its yield is below average. 4/5
Total: 21/25

Schroders' score of 21/25 suggests that it could be a strong candidate for a retirement fund portfolio -- and the investment management company certainly has a number of strong factors in its favour. Its dividends have risen or been held every year for the last 10 (the longest I could find data for), during which time the annual dividend has doubled. Anyone who purchased shares in Schroders 10 years ago will now be enjoying a dividend yield on cost of almost 8%, in addition to a capital gain of about 175% -- all from the relative safety of a FTSE 100 share.

Schroders' business appears to be in good health, too. Its operating margins are stable at more than 20% and in its most recent quarterly results it reported net inflows of 5.3 billion pounds, beating expectations and taking total assets under management to 203 billion pounds. According to the company, 68% of its assets under management have outperformed the relevant benchmark over the last three years, which should help it retain customers' funds over the long term.

Schroders' diversity is also attractive. Although the majority of its assets under management are from institutional investors such as pension funds, nearly one-third are from retail investors. Its global presence also provides an attractive geographical diversity, and the company is benefiting from the gradual recovery of the large North American market, which drove 1.6 billion pounds of net sales during the first half of this year, exceeding the total 1.1 billion pounds net sales from the rest of the world. The company has also reported that "longevity" has improved this year, with institutional investors leaving their funds invested with Schroders for an average of 6.3 years, up from 5.3 years in 2011. Part of this is probably due to the wider market recovery, but it is an attractive statistic all the same.

Schroders shares are currently priced at 15.8 times 2011 earnings, which is in line with the average price-to-earnings ratio for the FTSE 100. Although they aren't cheap, I think that Schroders is a quality company that could have real promise as a retirement share, and could be worth considering if you are looking for a financial share to hold over the long term.

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 June 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. Many of Woodford's choices look like excellent retirement shares to me, and the report explains how he chose some of his biggest holdings.

This report is completely free, and I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.


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