Is Antofagasta 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 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 (UKX) 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 Antofagasta  (LSE: ANTO.L  ) , the Chilean copper and gold miner whose shares have risen by almost 20% over the last three months. Is it a potential retirement share?

Copper bottomed?
To get an idea of Antofagasta's recent performance, let's see how it has performed against the FTSE 100 over the last 10 years:

Total Return

2007

2008

2009

2010

2011

Trailing-10-year avg.

Antofagasta

45.8%

(37.2%)

142.7%

63.9%

(20.1%)

30.4%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

8.0%

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.)

Antofagasta's outstanding performance against the FTSE 100 over the last ten years reflects the commodities boom and rapid growth in copper prices, which have now slowed a little.

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 Antofagasta shapes up:

Item

Value

Year founded

1888

Market cap

£12.2bn

Net debt

£518m

Dividend Yield

1.0%

5-year-average financials

Operating margin

55.9%

Interest cover

106.9x

EPS growth

10.4%

Dividend growth

28.6%

Dividend cover

11.2x

Source: Morningstar, Digital Look, Antofagasta

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

Criteria

Comment

Score

Longevity First listed in London more than a century ago, but it's changed a lot.

4/5

Performance vs. FTSE It's had a very good run.

4/5

Financial strength High margins and low debt make it pretty strong.

4/5

EPS growth Steady growth but now slowing.

3/5

Dividend growth Growing, but from a low level and through special dividends, which are more easily cut.

2/5

Total: 17/25

A score of 17/25 is pretty respectable and suggests that Antofagasta might be a suitable candidate for a retirement fund portfolio. However, in this case I don't think the score tells the whole story. Rather like Fresnillo  (LSE: FRES.L  ) , which I reviewed recently, Antofagasta is a low-cost metal producer with massive profits -- and a tiny dividend yield.

The reason for this discrepancy is the same in both cases -- these companies are investing heavily in new growth, which usually means exploration and the development of new mines. Much of Antofagasta's recent dividend growth has been via an annual special dividend, which the company slashed by 75% in March so that it could keep the cash to fund its current growth projects. While I prefer this approach to a debt-funded alternative, I am not sure it is an ideal scenario for a retirement share.

Antofagasta's new growth may well deliver substantial gains in the future, but I would not recommend it for a retirement share unless you can afford to accept this level of speculative risk, and are not planning to retire for a decade or more.

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.

One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to Dec. 31, 2011.

The good news is that you can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of 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 and I strongly recommend you download "8 Shares Held by Britain's Super Investor" 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 Head does not own any of the shares mentioned in this article. 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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