Is Standard Life 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 UK 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 Standard Life  (LSE: SL  ) , one of the U.K.'s oldest life insurance and pension providers.

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

Total Returns 2008 2009 2010 2011 2012 5 yr trailing avg
Standard Life -18.5% 13% 5.5% 1.6% 67.8% 11.2%
FTSE 100 -28.3% 27.3% 12.6% -2.2% 10% 5.2%

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.)

Standard Life was a mutual society until 2006, when it was floated on the stock market. This means we don't have access to a 10-year average trailing total return for the company, but its five-year figure places it well ahead of the FTSE, after a barnstorming performance in 2012. That's all very well, but retirement shares need to provide steady performance over decades, so we need to a look a little more closely at this company.

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 Standard Life shapes up:

Item Value
Year founded 1825
Market cap 8.1 billion pounds
Net debt (cash) (9.2 billion pounds)
Dividend Yield 4%
5-Year Average Financials
Operating margin 14.6%
Interest cover n/a
EPS growth 4.7%
Dividend growth 8%
Dividend cover 1.5

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

Criteria Comment Score
Longevity 187 years old, albeit with very little time as a plc 5/5
Performance vs. FTSE Impressive so far 3/5
Financial strength Pretty robust 4/5
EPS growth Earnings per share have been volatile in recent years 3/5
Dividend growth The dividend has risen steadily since 2008 3/5
Total: 18/25

Standard Life's short history as a publicly traded company leaves us in a difficult position. On the one hand, it is clearly a respectable, long-lived business that has been selling pensions and investment products for nearly 200 years. On the other hand, the average investor will find it very difficult to get a picture of its performance before 2006. So, can it be considered as a retirement share?

I think Standard Life has the makings of a good retirement share, especially as its increasing focus on fee-paying products should position it to benefit from the Retail Distribution Review (RDR), which comes into effect this year. RDR means that financial advisors can no longer give "free" advice and be remunerated via hidden commissions from the companies whose products they sell. Instead, they will have to charge clients an upfront fee, which is likely to push many smaller investors down the DIY route and toward retail products such as the bonds and funds available from Standard Life.

Standard Life also has a strong presence in the corporate pension sector, operating pension schemes for companies. This business should benefit from the government's auto-enrolment scheme, which requires employers to automatically enrol employees in a pension scheme if they don't opt out -- in the past, pension enrolment has been on an opt-in basis. This scheme started in October 2012 and Standard Life should be able to benefit from the influx of new corporate pension clients -- but early reports suggest that competition between pension providers to win this new business has been fierce, suggesting that profit margins could be squeezed.

My verdict
Standard Life's score of 18/25 reflects its impressive pedigree but short track record. Overall, I think it is likely to make a good retirement share, and I would consider it alongside peers such as PrudentialAviva, and Legal & General.

However, I think Standard Life's 60% share price gain over the last year has left it looking quite fully valued, with much of its near-term growth already priced in. I would prefer to wait for a dip in the price before buying -- and might also be tempted by Prudential's significant presence in the higher-growth Asian market, or by Aviva's greater yield and long-term recovery prospects. Ultimately, it's your choice -- but if you'd like some other suggestions for top-quality income shares, then the report I mention below may be of interest.

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.


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