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 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 all of the companies I've covered so far on this page.)
In this article I'll introduce the five lowest-scoring shares so far: G4S (LSE: GFS.L ) , BP (NYSE: BP ) , Legal & General (LSE: LGEN.L ) , SSE (LSE: SSE.L ) , and Rio Tinto (NYSE: RIO ) .
First, let's take a look at how each of them scored against my five key retirement share criteria (scores are out of a maximum of five):
|
Criterion
|
G4S
|
BP
|
Legal & General
|
SSE
|
Rio Tinto
|
|
Longevity
|
3
|
5
|
5
|
4
|
5
|
|
Performance vs. FTSE
|
3
|
3
|
3
|
4
|
3
|
|
Financial Strength
|
2
|
3
|
4
|
3
|
4
|
|
EPS Growth
|
3
|
2
|
2
|
3
|
3
|
|
Dividend Growth
|
4
|
3
|
3
|
4
|
3
|
|
Total
|
15/25
|
16/25
|
17/25
|
18/25
|
18/25
|
Not really that bad?
The first thing these names have in common is that they are not bad companies. The lowest score, 15 out of 25 for G4S, equates to 60% -- hardly a disaster. However, each company does have at least one weakness that prevented it achieving a coveted 20-plus score.
I do not think G4S's Olympic failure will have a significant effect on the company's fortunes, which look likely to be bolstered by ongoing emerging-market growth. However, I do think it might struggle to grow earnings as fast as it has done previously. The company's half-year results, published today, showed a modest increase in revenue and broadly flat operating profit. However, its pre-tax profit was down heavily on the same period last year, falling from 151 million pounds to 61 million pounds following the 50 million pound Olympic contract loss and other exceptional items. G4S also has quite a lot of debt: Net finance costs for the last six months were 54 million pounds, accounting for 22% of its operating profit.
Oil supermajor BP is a company in transition. Over the last couple of years, it has dealt with the Gulf of Mexico oil spill and sold numerous assets to raise funds, and now it's trying to extricate itself from its profitable but troubled Russian joint venture, TNK-BP. The problem with all of this is that the company's eventual destination remains unclear, and there is a growing body of opinion suggesting BP's top management is not up to the job of successfully completing this transformation. This is a story that will take several more years to play out, I suspect, hence BP's relatively low score.
Legal & General is one of the oldest companies in the FTSE 100 and a thoroughly solid organization. Its inclusion in this list is down to two factors: modest growth levels and a failure to outperform the FTSE 100 in recent years. Despite this, I would happily include a chunk of L&G shares in my retirement portfolio, not least because of the attractive 4.9% dividend yield they offer -- a payout level that's been maintained throughout the financial crisis and which should be safe going forward.
The two top scorers of this bunch, SSE and Rio Tinto, can hardly be said to belong in a "worst" list. Rio Tinto is one of the top three global miners in the FTSE 100 and, as I have written before, currently looks cheap; indeed, it's on my buy list for this autumn. The main fear with Rio is that things might get worse before they get better and that earnings growth will tail off in years to come. However, although I expect the company's share price to be volatile as the eurozone crisis plays out, I don't think Rio will experience this worst-case scenario.
SSE is nearly the direct opposite of Rio. Highly defensive, counter-cyclical, and a generous and devoted dividend payer, its main problem is that it is required to spend huge amounts of its regulated income on improving its services. However, since I wrote my original review, SSE has announced a 9% price increase, which will be unpopular with its customers, but should help ensure that profitability and dividend payments remain in line with expectations.
Learn from the best
Doing your own research is important, but another good way to identify 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 outperformed the wider index by a staggering 305% in the 15 years to the end of December 2011 -- a record few investors can even dream of. You can learn about all eight of Woodford's top holdings and see how he generates such fantastic profits in this free Motley Fool report. I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.
Buffett buy signal! The billionaire investor has found an attractive large cap right here in Britain! Discover what he bought and the price he paid in this special report -- "The One U.K. Share Warren Buffett Loves" -- it's free.
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