Is AMEC 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 oil and gas engineering services provider AMEC  (LSE: AMEC  ) .

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

Total Returns

2008

2009

2010

2011

2012

10-year trailing average

AMEC

(39.6%)

64%

47.6%

(18.5%)

14.1%

22.9%

FTSE 100

(28.3%)

27.3%

12.6%

(2.2%)

10%

8.2%

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.

AMEC has comprehensively outperformed the FTSE 100 over the last ten years, and boasts a 10-year average trailing total return nearly three times that of its parent index. AMEC's share price excluding dividends has risen by 586% over the last 10 years, compared to a fairly miserly 53% gain for the FTSE 100, providing an impressive demonstration of the power of share picking versus index tracking.

It's a promising start for AMEC, but can it continue to beat the index and does it provide the kind of reliable, above-average income we need from 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 AMEC shapes up:

Item

Value

Year founded

1848

Market cap

£3.2bn

Net debt (cash)

(£124m)

Dividend Yield

3%

5 year average financials

Operating margin

7.7%

Interest cover

n/a

EPS growth

31%

Dividend growth

20.1%

Dividend cover

2.9x

Source: Morningstar, Reuters, AMEC

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

Criteria

Comment

Score

Longevity

A long pedigree in the construction and energy industries.

5/5

Performance vs. FTSE

AMEC has consistently outperformed the FTSE 100.

5/5

Financial strength

Net cash, stable margins and steady earnings growth.

4/5

EPS growth

Earnings per share have nearly doubled in the last five years

4/5

Dividend growth

AMEC's dividend has grown well above inflation.

4/5

Total: 22/25

AMEC's growth is living proof of the relatively reliable route to wealth offered by providing essential services to companies engaged in high-risk, high-reward activities. Much of AMEC's work involves deep sea oil and gas projects, and it has undoubtedly benefited from the sustained period of high oil prices that has led to a boom in this area.

Although the firm's shares aren't cheap, trading on a P/E of 15 and a dividend yield of 3%, they remain at a discount to peers such as PetrofacHunting and Wood Group, all of which are more tightly focused on the oil and gas industry. I see AMEC's diversity -- it also works in the nuclear, waste, mining and electricity sectors -- as a good thing, as it should make the company fairly resilient to downturns in individual sectors, although any prolonged slump in oil prices would still be likely to hit the company hard. Indeed, AMEC's acquisition of Serco's nuclear services group in June 2012 could turn out to be very astute, if the U.K.'s does end up building more nuclear power stations in coming years.

Is AMEC a retirement share?
AMEC's score of 22/25 is one of the highest we've seen in this series and suggests that the firm could be a good share for a retirement portfolio. Broadly speaking, I think this is the correct conclusion -- and I believe that in the current economic environment, AMEC's shares may have a few more good years before growth moderates.

This firm has increased its dividend every year since 1997, so potential investors shouldn't ignore the attractive dividend growth forecast for the next two years. If correct, it should help lift AMEC's yield on current cost to more than 4% -- a healthy retirement income. Overall, I think AMEC could be a good retirement share and deserves a closer look.

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 October 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. 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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