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 insurance firm Resolution (LSE: RSL), the investment firm that has built an insurance business based around its 2009 acquisition of life insurer Friends Provident.
Resolution vs. FTSE 100
Let's start with a look at how Resolution has performed against the FTSE 100 since it was listed in December 2008:
| Total Returns | 2009 | 2010 | 2011 | 2012 | 2013 YTD | 3-Yr. Trailing Avg. |
|---|---|---|---|---|---|---|
| Resolution | -19.5% | -88.0% | 15.5% | 6.6% | 10.3% | -43.6% |
| FTSE 100 | 27.3% | 12.6% | -2.2% | 10.0% | 9.0% | 8.0% |
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.)
Resolution's early performance against the FTSE 100 was very poor, but the company has gradually improved its average returns, thanks in part to its extremely high dividend yield.
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 Resolution shapes up:
| Item | Value |
|---|---|
| Year founded | 2008 |
| Market cap | 3.9 billion pounds |
| Net debt (cash) | (7.6 billion pounds) |
| Dividend Yield | 7.3% |
| 3-Year Average Financials | |
| Operating margin | 19.0% |
| Interest cover | n/a |
| EPS growth | -23.4% |
| Dividend growth | 26.9% |
| Dividend cover | 4.6x |
Here's how I've scored Resolution on each of these criteria:
| Criteria | Comment | Score |
|---|---|---|
| Longevity | A new shell for several older insurance businesses. | 2/5 |
| Performance vs. FTSE | Average at best, so far. | 2/5 |
| Financial strength | Net cash but disappointing profitability. | 3/5 |
| EPS growth | Very disappointing. | 2/5 |
| Dividend growth | Resolution's dividend has risen strongly since 2009. | 4/5 |
| Total: 13/25 | ||
Resolution's arrival in the FTSE 100 coincided with the onset of the eurozone crisis, which placed the dividends and profitability of many insurance companies at risk, due to their substantial holdings of European government bonds. Resolution also had an added problem to deal with -- after its acquisition of life insurer Friends Provident in 2009, its stated goal was to acquire several further life insurance companies, before combining these into one new company and, eventually, exiting from the investment with a profit. Market conditions made this plan unworkable, and investors shunned Resolution shares, despite their temptingly high yield -- which reached over 10% at one point in 2012.
As a result, after completing the acquisition of Bupa Health Assurance and most of AXA's life insurance business, Resolution decided to change direction last year. The firm told investors that it would simplify its complex corporate structure and focus on combining its three acquisitions into a single, profitable life insurance company. This, coupled with the stability we have seen in the eurozone since late last year, has helped Resolution's share price rise by 26% since October 2012, although at 7.5%, the company's dividend yield is still the highest in the FTSE 100, suggesting that many investors still see it as a risky proposition.
My verdict
So far this year, we've seen both Aviva and RSA Insurance cut their dividend payouts, surprising and disappointing investors. I don't expect Resolution to cut its payout when it announces its final results later this week, but I do think it remains a relatively risky company to invest in, due to its short history and uncertain future plans.
For these reasons, Resolution is not a share I'd put in my retirement portfolio, despite its extremely attractive yield. I'd much rather cut my risk and accept a lower yield from one of Resolution's insurance peers, such as Aviva, which I think is more likely to provide a stable income over the long-term future.
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