Are These the Ultimate Retirement Shares?

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 to build 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 over the long term and support a lower-risk, income-generating retirement fund (you can see all of the companies I've covered so far on this page).

Over the last week or so, I've looked at Anglo American (LSE: AAL.L  ) , Xstrata (LSE: XTA.L  ) , Kingfisher (LSE: KGF.L  ) , CRH (LSE: CRH.L  ) , and J Sainsbury (LSE: SBRY.L  ) . Let's take a look at how each of them scored against my five key retirement-share criteria (each criterion is scored out of a maximum of five):

Criterion

Anglo
American

Xstrata

CRH

Kingfisher

Sainsbury

Longevity

4

2

3

3

5

Performance vs. FTSE

4

3

2

3

3

Financial strength

3

4

3

4

4

EPS growth

3

4

3

4

4

Dividend growth

1

2

4

3

4

Total (out of 25)

15

15

15

17

20

A clear winner
Perhaps unsurprisingly, given the nature of the other four businesses, Sainsbury came out as the clear winner in this group of five, scoring 20 out of 25 thanks to its strong track record of longevity, steady dividend growth, earnings growth, and financial strength. Sainsbury's twin weaknesses seems to be that its operating margins are lower than those of Tesco and Morrison and that customers perceive it as being more expensive than these two peers. However, according to its latest trading statement, Sainsbury is having some success at using its "Brand Match" initiative to convince customers that it isn't more expensive than the others. Its strong property portfolio and associated net asset value also go some way toward offsetting its lower margins. All in all, Sainsbury remains an attractive retirement share.

DIY vs. cement?
B&Q's presence across the U.K. is nearly as ubiquitous as Sainsbury's, but unlike the supermarket chain, its sales were hurt by this summer's wet weather. Over the longer term, however, the prospects of B&Q parent Kingfisher look fairly bright, with a market-leading presence in Britain and France and developing markets in Poland, Russia, Turkey, and China. It's worth remembering that a fair amount of Kingfisher's business is with trade customers, so it benefits both from DIY activity and from homeowner-funded trade business.

Kingfisher's score of 17was higher than the 15 managed by CRH, which is one of the world's largest cement companies. CRH's fortunes have taken a big knock in recent years, and it may be some time before it can really start to deliver solid earnings growth once more. The problem for CRH is that despite its global footprint, almost all of its markets are in the economic doldrums at present. The only possible bright spot is that the U.S. housing market seems to be starting to recover. Unfortunately, I think CRH shareholders may see more downside before things really start to turn around, and I wouldn't add CRH to my retirement portfolio at the moment.

Mining troubles
The ups and downs of the global mining industry often feature in the investment press, and big miners like Anglo American and Xstrata are among the most volatile shares in the FTSE 100, surging up and down on a near-daily basis. Underlying that, however, I believe the big miners are currently near the bottom of their cycle and are attractively priced, meaning that now could be a good time to buy.

Anglo American and Xstrata both scored 15 in my survey, slightly below the 18 of my preferred big miner, Rio Tinto. Anglo American is particularly heavily exposed to the ongoing industrial-relations problems in South Africa, where it has several large assets. It was also forced to cancel its dividend for 18 months during the 2008 and 2009 downturn -- something neither BHP Billiton nor Rio Tinto had to resort to. Xstrata also slashed its dividends, and its lack of history counts against it, but it has since performed strongly in recent years and looks quite appealing to me, not least because if its merger with Glencore International is successful, shares in "Glenstrata" could provide an attractive way to generate a long-term income from commodities.

An expert tip
Although doing your own research is important, one way to identify 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 had 20 billion pounds of private investors' money under management at the end of January 2012 -- more than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% over 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. 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 owns shares in Rio Tinto and Tesco but does not own any of the other shares mentioned in this article. The Motley Fool owns shares in Tesco. 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.


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