Is Legal & General 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 things will improve 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 to protect yourself from the downturn, however, is to build 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 Legal & General Group (LSE: LGEN.L  ) , one of the U.K.'s oldest and largest life insurance, savings, and investment management companies, with 7 million U.K. customers and 370 billion pounds under management worldwide. Legal & General was one of the first companies to provide Foolish low-cost index trackers, and this remains a big part of its business.

A proper blue chip
Although it's been five years since the credit crisis struck, the financial sector continues to attract scandals and accounting losses in equal measure -- so how has Legal & General fared against the FTSE 100?

 

2007

2008

2009

2010

2011

Trailing 10-year average

Legal & General Total Return

(13.5%)

(38.1%)

9.1%

25.1%

11.5%

4.9%

FTSE 100 Total Return

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.3%

Source: Morningstar. Total return includes 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.

Legal & General's trailing 10-year average total return is below that of the FTSE 100, but it has proved relatively stable compared with many of its peers and continues to deliver reliable profits: Its half-yearly results, published today, showed a 5% increase in operating profit.

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 Legal & General shapes up:

The basics

Operating Margin

7.9%

Interest Cover

N/A

EPS Growth

(14.2%)

Dividend Growth

3.7%

Dividend Cover

1.95 times

Five-year average financials

Operating Margin

7.9%

Interest Cover

N/A

EPS Growth

(14.2%)

Dividend Growth

3.7%

Dividend Cover

1.95 times

Source: Morningstar; Digital Look; Legal & General.

Here's how I've scored Legal & General on each of these criteria:

Criterion

Comment

Score (out of 5)

Longevity

Nearly 200 years of continuous trading.

5

Performance vs. FTSE

Recently a strong performer against the FTSE.

3

Financial Strength

Strong cash generation and plenty of net cash mean it can ride out most storms.

4

EPS Growth

A return to EPS growth is expected this year.

2

Dividend Growth

L&G's dividends have just about kept pace with inflation over the last five years.

3

 

 

Total: 17/25

A score of 17 out of 25 reflects the risk premium attached to financial shares at the moment but suggests that Legal & General could be a good candidate for a retirement fund portfolio, especially over the longer term -- a 7 billion pound company that has survived independently and profitably for 176 years is likely to continue to do so.

An expert's choice?
Another way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, whose dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in the free Motley Fool Report "8 Shares Held By Britain's Super Investor." I suggest you download this report today, as it is available for a limited time only.

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:

Roland does not own shares in Legal & General. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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