Are John Wood Group, Melrose Industries, and Polymetal International the Ultimate Retirement Shares?

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 UK 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 all of the companies I've covered so far on this page).

Over the last few weeks, I've looked at Melrose Industries (LSE: MRO), John Wood Group (LSE: WG), Polymetal International (LSE: POLY), EVRAZ (LSE: EVR) and Vedanta Resources (LSE: VED). Let's take a look at how each of them scored against my five key retirement share criteria:

Criteria

EVRAZ

Vedanta

Resources

Polymetal

International

Melrose

Industries

John Wood

Group

Longevity

2/5

3/5

1/5

2/5

5/5

Performance vs. FTSE

1/5

1/5

3/5

4/5

4/5

Financial strength

2/5

3/5

3/5

4/5

4/5

EPS growth

1/5

2/5

4/5

3/5

3/5

Dividend growth

2/5

4/5

3/5

4/5

3/5

Total

8/25

13/25

14/25

17/25

19/25

EVRAZ
EVRAZ shareholders have seen the value of their shares drop by more than 50% over the last 12 months, and the Russian steelmaker looks likely to drop out of the FTSE 100 in its next quarterly reshuffle, which is due at the end of June.

The firm recently cancelled its final dividend, has a net debt of $6bn, and spent $645m on interest payments last year, dwarfing its $243m operating profit. EVRAZ also depends on volatile commodity prices and the global construction industry for its business, so it's definitely not my idea of a retirement share.

Vedanta Resources
Vedanta Resources was the first Indian firm to get a full listing on the London Stock Exchange. The natural resources firm combines interests in oil, coal, power generation and other commodities.

Vedanta looks quite an attractive business in some ways, but its rapid expansion, fuelled by acquisitions, has left it with a net debt of $9.8bn, which currently requires interest payments of $100m per month. Such high gearing disqualifies it as a retirement share for me, although it could become an attractive buy in the future.

Polymetal International
Gold miners are not in favor at the moment, and with good reason -- most of them have failed to deliver bumper profits despite record gold prices in recent years. Now that the price of gold has slumped, many gold miners are scrambling to cut costs and work out how to stay afloat.

Polymetal International's share price has fallen by 38% so far this year, and its all-in cash cost per ounce of $1,047 shows why. If gold drops to around $1,100-$1,200, as it could easily do, Polymetal will be left with almost no profit margin and no ability to generate free cash flow. This isn't the kind of business you want to depend on for your retirement income.

Melrose Industries
Melrose Industries is an investment business that buys manufacturing companies, turns them around, and sells them for a profit. The management team has an impressive track record, and shareholders have seen the value of their dividend payments increase by 57% since 2008, but I don't think this is the kind of stable, long-lived business that will provide a consistent retirement income.

John Wood Group
Shareholders in oil and gas services group John Wood have seen the value of their shares rise by 400% over the last ten years.

It's definitely a quality business, and the firm has an engineering heritage that dates back to 1912. For anyone who purchased shares in the company when they were cheaper and now enjoys a decent dividend yield on cost, I would say that Wood Group could be a good retirement share. For new investors, it looks less attractive, as the firm's price to earnings ratio of 20 and forward dividend yield of just 1.7% make it look expensive, and a poor source of income.

The best FTSE 100 dividends?
Although I think John Wood and Melrose Industries are quality companies, neither is ideal as a retirement share, and there are definitely more attractive, high-yielding alternatives elsewhere in the FTSE 100.

Indeed, I can tell you that none of the five shares above were 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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