LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered, annuity rates have plunged, and uncertainty has ruled the roost. There's no sign of improvement, 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, especially if you keep the shares within a tax-efficient ISA or SIPP.
It's no coincidence that the world's most successful investor, Warren Buffett, prefers such companies. He recently invested in a large FTSE 100 company that fits the bill perfectly (you can find full details in this free report).
In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE over the long term and support a lower-risk, income-generating retirement fund. I'm going to kick off the series with a look at SSE
Defensive performance
Utility shares are traditionally "defensive" shares -- shares that are popular during times of economic volatility, such as these last few years. SSE has benefited from this defensive bias and from the attraction its dividend policy holds for long-term investors looking for a reliable income. As a result, it has massively outperformed the FTSE 100 over the last 10 years:
|
Year |
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing-10-Year Average |
|---|---|---|---|---|---|---|
|
SSE Total Return |
8.9% |
(22%) |
0.8% |
11.5% |
11.5% |
11.6% |
|
FTSE 100 Total Return |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
5.8% |
If you're building up a retirement portfolio, total return is a useful metric for measuring the performance of your stock, as it captures the effects of share-price changes 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.
The trailing-10-year average total return highlights just how valuable SSE's stability and strong dividend performance are for retirement investors. Despite SSE getting left behind in the rebound rally of 2009, it didn't crash in 2011, and its trailing total return over the last 10 years is double that of the FTSE 100.
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 SSE shapes up.
The basics:
| Year Founded | 1998* |
| Market Cap | 13.4 billion pounds |
| Net Debt | 5.9 billion pounds |
*SSE was formed when two much older companies, Scottish Hydro Electric and Southern Electric, merged.
Five-year average financials:
|
Operating Margin |
4.79% |
|
Interest Cover |
5.28 |
|
EPS Growth |
160% |
|
Dividend Growth |
10% |
|
Dividend Cover |
1.5 |
|
Dividend Yield |
5.72% |
Here's how I've scored SSE on each of these criteria:
|
Criterion |
Comment |
Score (out of 5) |
|---|---|---|
|
Longevity |
Although SSE has only been around in its present form for 14 years, its component businesses are much older, and utilities generally have a long life expectancy. |
4 |
|
Performance vs. FTSE |
Double the FTSE 100's total return over 10 years seems pretty solid. |
4 |
|
Financial Strength |
Utilities tend to be heavily leveraged, and SSE's margins are slimmer than those of many other companies. However, both debt and margins are lower-risk than average. |
3 |
|
EPS Growth |
SSE's reported EPS figures are very volatile, due mostly to the impact of changing energy prices and regulatory restrictions. The underlying growth is more modest but stable. |
3 |
|
Dividend Growth |
SSE has increased its dividend every year for 13 years, but it sometimes pays out a very high proportion of earnings, increasing the risk that it might not be able to sustain the rate of increase. |
4 |
|
|
|
Total: 18/25 |
A score of 18 is pretty solid, and if anything, I think it underplays the security offered by SSE's large, heavily regulated business. Overall, I think the figures suggest that SSE could be a strong candidate for a retirement fund portfolio.
Finally, if you are interested in dividend-paying retirement shares, I would strongly suggest you take a look at some of Neil Woodford's choices. Neil is one of the U.K.'s most successful fund managers and specializes in identifying companies with strong income potential. You can find out about eight of Neil's biggest holdings in this free Fool report, "8 Shares Held By Britain's Super Investor," which I strongly recommend, as many of Neil's picks are excellent retirement shares.
Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!
Further investment opportunities:
