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
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
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.
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