Is Polymetal International 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 Russian gold and silver miner Polymetal International  (LSE: POLY  ) (NASDAQOTH: POYYF), which joined the FTSE 100 in 2011.

Polymetal International vs. FTSE 100
Let's start with a look at how Polymetal International has performed against the FTSE 100 since its flotation in 2011:

Total Returns

2011
(part year)

2012

2013 YTD

Trailing
12 months

Polymetal International

18.8%

11.4%

(26.3%)

(35.6%)

FTSE 100

(2.2%)

10%

9.9%

10.4%

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.

Polymetal International's trading history on the London Stock Exchange is far too short allow me to form any conclusions about its long-term performance against the FTSE 100, but the stock's weakness in the face of the falling price of gold is not reassuring. While Polymetal International's share price has fallen by 36% so far this year, fellow FTSE 100 gold producer Randgold Resources has fallen just 12.5%, highlighting Randgold's stronger track record and financial strength.

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 Polymetal International shapes up:

Item

Value

Year founded

1998

Market cap

£2.9bn

Net debt

$1.0bn

Dividend Yield

2.7%

2012 financials

Operating margin

33.8%

Interest cover

34.7x

EPS growth

44%

Dividend growth

55%

Dividend cover

3.3x

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

Criteria

Comment

Score

Longevity

Very little times as a London-listed firm.

1/5

Performance vs. FTSE

Too early to say.

3/5

Financial strength

Profitable, but has little cash and quite high costs.

3/5

EPS growth

A good record so far.

4/5

Dividend growth

Strong growth so far.

3/5

Total: 14/25

If the price of gold recovers -- or at least stabilizes -- Polymetal International could be a very attractive investment in the short and medium term. It offers an attractive dividend policy of 30% of earnings plus periodic special dividends, production grew by 16% in the first quarter of this year compared to the first quarter of 2012, and it's on course to produce 1.2 million gold-equivalent ounces this year.

However, I don't believe the price of gold is going to rebound strongly, and neither, it seems, does Polymetal's management. The firm announced last week that it had initiated a review of all discretionary capital spending, including exploration projects, in response to recent falls in the prices of gold and silver. Personally, I think this is a good idea regardless of what happens to metals prices -- Polymetal's all-in cash cost was $1,047 per gold-equivalent ounce last year. Although this was a 15% improvement on 2011, it's still pretty high if the gold price continues to drift closer to $1,000 per ounce, as some experts think it might.

Despite this, it is to Polymetal's credit that it has promptly adopted the new 'all-in cash costs' reporting measure, which includes capital expenditure that is excluded from the traditional 'cash operating costs per ounce' measure favored by many miners.

My verdict
Although Polymetal International's forecast dividend yield of around 4.3% is attractive, it could yet be vulnerable to a cut. Polymetal's short history alone would disqualify it from my retirement portfolio and I also have concerns over its ownership -- 48% of its shares are held by just three shareholders, leaving British shareholders, including institutions, with very little influence over how the company is run. I also dislike the company's total dependence on the price of gold -- there's no telling how this will fluctuate over the long term.

The best FTSE 100 dividends?
Polymetal International may offer a prospective dividend yield of 4% or more, but for how long? Some companies in the FTSE 100 have been paying rising dividends for more than twenty years, and at least one of these has been chosen by The Motley Fool's team of analysts for their latest special report, "5 Shares to Retire on".

The Fool's in-house experts have crunched the numbers on every company in the FTSE 100 and identified five of the best blue chip dividend shares in the UK. I believe that this should be essential reading for anyone aiming to build a diversified, income portfolio for their retirement.

If you would like to know more, click here now to download your copy of this report -- it's free, but availability is strictly limited, so don't delay.

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