Is Anglo American the Ultimate Retirement Share?

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 Anglo American  (LSE: AAL.L  ) , one of the LSE's three biggest miners and the world's largest platinum producer.

Mining a boom
First, let's take a look at how Anglo American has performed against the FTSE 100 over the last 10 years:

Total Return

2007

2008

2009

2010

2011

Trailing-10-year avg.

Anglo American

14.9%

(47.7%)

75.4%

23.6%

(27.4%)

9.5%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.8%

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.)

Anglo American's trailing-10-year-average total return is impressive but is the result of the global commodities boom of the last 10 years, fuelled by massive growth in China. Anglo's share price is down by more than 40% from its 2007-2008 peaks -- so is now the right time to add it to a retirement portfolio?

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 Anglo American shapes up:

Item

Value

Year founded

1917

Market cap

£26.5bn

Net debt

£734m

Dividend Yield

2.5%

5-year-average financials

Operating margin

29.0%

Interest cover

13.3x

EPS growth

17.3%

Dividend growth

(8.0%)*

Dividend cover

7.99x*

Source: Morningstar, Digital Look, Anglo American. *Anglo American did not pay a dividend in 2009.

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

Criteria

Comment

Score

Longevity Almost up to the century mark.

4/5

Performance vs. FTSE Pretty good over the last decade, albeit volatile.

4/5

Financial strength Decent margins, although debt has risen this year.

3/5

EPS growth Highly dependent on commodity prices.

3/5

Dividend growth No payout in 2009 and 2008's final dividend was cancelled.

1/5

Total: 17/25

The one thing you do need from a retirement share is consistency -- and Anglo American missed 18 months' worth of dividends in 2008 and 2009 -- while its main peers, Rio Tinto  (LSE: RIO.L  ) and BHP Billiton  (LSE: BLT.L  ) , managed to continue paying dividends. Indeed, although Rio's dividend was slashed in 2009, BHP actually increased its dividend that year.

Anglo American is the world's largest platinum producer and a major producer of diamonds, thanks to its 85% stake in De Beers, the world's biggest diamond miner. Despite this, platinum and diamonds accounted for just 9% of Anglo's operating profits in the first half of this year. Iron ore and manganese delivered 48% of profits, while coal and copper delivered 42%.

Anglo's score of 17/25 is slightly lower than the 18/25 managed by BHP and Rio in my review of those companies. I think this is fair and reflects Anglo's slightly weaker position as a retirement share.

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 owns shares in Rio Tinto but does not own any of the other 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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