Is Aberdeen Asset Management 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 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 Aberdeen Asset Management  (LSE: ADN  ) (NASDAQOTH: ABDNF  ) , the global investment management group that has client funds worth 193 billion pounds under management.

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

Total Returns 2008 2009 2010 2011 2012 10-Yr. Trailing Avg.
Aberdeen Asset Management -24.4% 17.2% 56.6% 8.9% 78.6% 26%
FTSE 100 -28.3% 27.3% 12.6% -2.2% 10% 9.4%

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.)

You wouldn't normally expect a FTSE 100 company to deliver a total return of 78.6% in one year, but that's what Aberdeen Asset Management did in 2012, the year in which it joined the FTSE 100. Last year's outperformance has given a big lift to the firm's 10 year average total return, which standards at 26%, compared to 9.4% for the FTSE 100.

However, flash-in-the-pan performances are no use in a retirement share -- what we need is consistent returns, year after year. Can Aberdeen Asset Management deliver?

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 Aberdeen Asset Management shapes up:

Item Value
Year founded 1983
Market cap 5.1 billion pounds
Net debt (cash) (2.6 billion pounds)
Dividend Yield 2.7%
5-Year Average Financials
Operating margin 23.1%
Interest cover 23.6x
EPS growth 38%
Dividend growth 15.9%
Dividend cover 1.6x

Here's how I've scored Aberdeen Asset Management on each of these criteria:

Criteria Comment Score
Longevity It's still a very young business. 2/5
Performance vs. FTSE A 10-year record of outperformance. 5/5
Financial strength Robust and cash rich. 5/5
EPS growth Strong growth in recent years. 5/5
Dividend growth Attractive growth and good cash flow coverage levels. 5/5
Total: 22/25

Aberdeen Asset Management is an impressive business, although its short history weakens its case as a retirement share; the Aberdeen-based company was only founded in 1983, which makes it very young when compared with peers such as Schroders, which has been in business for more than 200 years. However, Aberdeen's score of 22/25 is well deserved and reflects its strong growth, high profitability and strong cash generation, which underpins a dividend that has doubled since 2007 and which was covered 2.5 times by free cash flow in 2012.

Although Aberdeen Asset Management's 2012 dividend yield of 2.7% is below the FTSE 100 average of 3.1%, a further increase is pencilled in this year that provides a forecast dividend yield of 3.4% at the firm's current share price, providing an attractive level of return that should remain well-covered by earnings and cash flow -- making it very safe.

What's more, although Aberdeen's 53% share price rise in 2012 makes it look expensive on a historic basis -- with a price to earnings ratio (P/E) of 26 based on last year's earnings -- the company's forecast earnings growth for 2013 gives it a forecast P/E of just 14.7, below the FTSE 100 average of 16. Forecasts are by their nature subject to change, but Aberdeen has delivered very strong growth in recent years and may be able to sustain this for a little longer yet.

My verdict
Aberdeen Asset Management has the potential to be an excellent retirement share, with a well-covered and progressive dividend policy, a rising yield, and a strong financial position. The company's youth could be a slight concern, but Aberdeen's management appears to be well on the way to creating a large, sustainable business.

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