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 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 (INDEX: ^FTSE ) 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 one of the U.K.'s big four banks, Barclays (LSE: BARC.L ) (NYSE: BCS ) . Barclays was recently embarrassed by the LIBOR scandal, after which its colorful former CEO, Bob Diamond, resigned. Yesterday, it announced it had appointed a new chief executive, Antony Jenkins, a career staffer at the bank who was previously head of retail banking and has also been in charge of Barclaycard -- in both cases with considerable success.
Start low, aim high
Jenkins will have his hands full trying to improve Barclays' performance record against the FTSE 100. As these figures show, the bank's performance over the last 10 years has been far from impressive:
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2007
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2008
|
2009
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2010
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2011
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Trailing 10-Year Average
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|
Barclays total return
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(26.6%)
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(62.8%)
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80.6%
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(3.6%)
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(30.6%)
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(2.5%)
|
|
FTSE 100 total return
|
7.4%
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(28.3%)
|
27.3%
|
12.6%
|
(2.2%)
|
6.9%
|
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.
Barclays' trailing 10-year average shows how hard it is for companies to overcome the effects of a few bad years and highlights how important stability is to your portfolio. Always remember that recovering from a 50% loss requires a 100% gain -- just to get you back to where you started.
For Barclays' new CEO, the challenge of creating sustainable growth will be amplified by the fragility of the eurozone crisis and the bank's ongoing legal and reputational problems.
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 Barclays shapes up:
The basics
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Year Founded
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1896
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Market Cap
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22 billion
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Net Debt
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--
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Dividend Yield
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3.3%
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Five-year average financials
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Operating Margin
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20.6%
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Interest Cover
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N/A
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EPS Growth
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(14.9%)
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|
Dividend Growth
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60%*
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Dividend Cover
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6.5 times
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Source: Morningstar, Digital Look. *Improbable figures like this are what happen when the dividend is slashed almost to nothing and then reinstated. Barclays' forecast dividend for 2012 is 20% of its 2007 dividend.
Here's how I've scored Barclays on each of these criteria:
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Criterion
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Comment
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Score (out of 5)
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Longevity
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No problems here.
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5
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Performance vs. FTSE
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A sorry tale indeed.
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1
|
|
Financial Strength
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Unlikely to face major problems.
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4
|
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EPS Growth
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This year may see a return to growth.
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3
|
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Dividend Growth
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Growth of about 10% per year is forecast.
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3
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|
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Total: 16/25
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Barclays avoided needing a government bailout during the financial crisis and today trades at about half of its tangible book value, despite being profitable. If you believe the banking sector will eventually return to a profitable normality, as I do, then Barclays' shares could present an attractive value opportunity and the possibility of a much higher yield on cost in years to come -- ideal for a retirement portfolio.
The bank's score of 16 out of 25 reflects the fact that it's still in recovery and faces a number of potential hurdles. However, I think it still makes a good candidate for a retirement fund portfolio.
Better than banking?
Some investors remain wary of banking shares, and given recent scandals, they may be right. One man who is still avoiding banking shares is fund manager Neil Woodford, who sold his banking shares well before the sector crashed, having seen the warning signs that most investors were choosing to ignore.
Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to the end of 2011. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. It's available for a limited time only, so I strongly recommend you download "8 Shares Held By Britain's Super Investor" today.
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!
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