Is BT 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 of things improving any time 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 BT Group (LSE: BT-A.L) (NYSE: BT), whose infrastructure remains at the heart of the UK's telecoms network but has struggled to deliver the growth expected by investors in recent years.

Dialing a wrong number?
These numbers show how BT has performed against the FTSE 100 over the last 10 years:

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.

After suffering very badly in 2007-2008, BT was slower to recover than the wider market in 2009 but since appears to have turned a corner. BT's 10-year average trailing return still lags that of the FTSE 100, however.

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 BT shapes up:

Basics:

Sources: Morningstar, Digital Look, and BT Group. *1981 was the year when the British Telecommunications Act led to the creation of the telecoms function from the Post Office. In 1982, BT was privatized. Prior to this, the Post Office had been the monopoly supplier of U.K. telecoms services since 1912.

Five-Year Average Financials:

Sources: Morningstar, Digital Look, and BT Group.

Here's how I've scored BT on each of these criteria:

BT's score of 14/25 may seem a little harsh, but I don't find BT particularly attractive when compared to fellow FTSE 100 member Vodafone, which trades on a slightly higher valuation but offers a much greater dividend yield, stronger finances, and a better track record of growth.

BT is still paying the price for its debt-fueled expansion in the 1990s, which resulted in it flogging its Yell and O2 businesses in order to stay afloat. It has struggled to deliver significant growth over the last decade, although there are now signs of a possible turnaround, as its triple-play offering (telephone, broadband, and television) is becoming increasingly strong. However, BT has already spent 890 million pounds this year on the broadcasting rights to soccer and rugby matches, so it is banking on continued subscriber growth for BT Vision, its television service.

Expert selections

Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors. Interestingly, BT is currently one of the largest shareholdings of Neil Woodford, who manages more money for private investors than any other City manager -- he had 20 billion pounds under management at the end of January 2012.

Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years ending Dec. 31, 2011, and you can learn about his top holdings and how he generates such fantastic profits in this free Motley Fool report.

Many of Neil Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings. This report is completely free, but it is 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!

Further investment opportunities:

• Here's How I Hope To Retire
• 10 Steps To Making A Million In The Market
• 8 Shares Held By Britain's Super Investor