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 Spanish bank Banco Santander (BNC) (SAN 0.20%), which is available on the London Stock Exchange even though it isn't a FTSE member.
Banco Santander vs. FTSE 100
If it was a member of the FTSE 100, Santander would be one of the 10 largest companies in the index, thanks to its 50 billion-pound market capitalization. So how has it performed against the FTSE 100 over the last 10 years?
| Total Returns | 2008 | 2009 | 2010 | 2011 | 2012* | 5 yr trailing avg |
|---|---|---|---|---|---|---|
| Santander | -41.3% | 65.7% | -31.5% | -21.8% | 8.5% | -10.3% |
| FTSE 100 | -28.3% | 27.3% | 12.6% | -2.2% | 9.3% | 2.7% |
Source: Morningstar, *2012 total return to 30/11/12. 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.
Santander's 5-year trailing average (a 10-year figure is not available) total return is pretty dismal, as you'd expect. The bank has had to deal with the fallout of the Spanish property market crash and the general economic depression that has swept Spain. Yet Santander isn't just a Spanish bank, and its global operations have remained profitable.
Santander's total return for 2012 has come very close to matching that of the FTSE 100, a respectable result given its exposure to Spanish government debt and the turbulence of the Spanish market.
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 Santander shapes up:
| Item | Value |
|---|---|
| Year founded | 1857 |
| Market cap | £50bn |
| Net debt | n/a |
| Dividend Yield | 10% |
| 5 year average financials | |
| Operating margin | 26.9% |
| Interest cover | n/a |
| EPS growth | -7% |
| Dividend growth | 9.9% |
| Dividend cover | 3.7x |
Source: Morningstar, Reuters, Banco Santander.
Here's how I've scored Santander on each of these criteria:
| Criteria | Comment | Score |
|---|---|---|
| Longevity | Santander has blue chip credentials. | 5/5 |
| Performance vs. FTSE | Overall it's not pretty, but things seem to have stabilised. | 2/5 |
| Financial strength | Healthy profits have continued throughout the downturn. | 4/5 |
| EPS growth | Earnings have fallen in recent years. | 2/5 |
| Dividend growth | High yield, but no growth since 2010 and none likely. | 3/5 |
| Total: 16/25 | ||
Santander has become a familiar name on the British high street since it bought Abbey a few years ago, and it has a similar retail presence in several other large economies, including Brazil, Germany, Mexico and the even the United States.
However, unlike many of the big British and American banks, Santander is focused almost exclusively on retail banking. In total, 86% of its revenues and 80% of its profits come from retail banking and it has 102 million customers globally.
If you're used to looking at share information for British banks like RBS and Lloyds, you may be wondering if I've made a mistake with Santander's yield. I haven't -- this major bank really does offer a dividend yield of 10%, and what's more, it is well covered, and has been throughout the financial crisis. Rather like HSBC, Santander has continued to make big profits throughout the crisis, even though its Spanish operations have been affected by the country's role in the eurozone crisis.
Of course, a yield that high is often a warning sign -- and Santander's 10% yield certainly comes with an additional measure of risk, as the eurozone crisis is far from solved. A particular risk is that Spain could yet default on some of its debt -- as the biggest Spanish bank, Santander holds a lot of Spanish government debt, and such a write-off could prove painful. For me, this risk means that I wouldn't buy Santander shares if I was planning to retire within the next 10 years -- but for someone whose retirement is more distant, I think that Santander shares could prove to be a good, income-generating retirement investment.
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 31 October 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.
