Is Shire 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 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 Shire  (LSE: SHP.L  ) (Nasdaq: SHPG  ) , the pharmaceutical company that built its reputation on drugs to treat attention deficit and hyperactivity disorder, or ADHD.

Clinical excellence?
Shire's performance against the FTSE 100 over the last 10 years has been extremely impressive, as these figures show:

Total Returns

2007

2008

2009

2010

2011

10-Yr. Trailing Avg.

Shire

8.9%

(11.6%)

20.2%

28.1%

45.8%

13.2%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.4%

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.)

Despite this superb performance, it's worth noting that Shire is not immune from the patent cliff issues facing its peer AstraZeneca -- which recently reported a 15% drop in third-quarter revenue due to loss of exclusivity on key drugs -- and Shire's share price is down 21% so far this year. However, since we are looking for long-term investments, this price cut could turn out to be a good thing. Let's take a closer look.

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 Shire shapes up:

Item

Value

Year founded

1986

Market cap (pounds)

9.9 billion

Net debt (pounds)

295 million

Dividend Yield

0.5%

5-Year Average Financials

Operating margin

6.1%

Interest cover

11.0 times

EPS growth

22%

Dividend growth

16.0%

Dividend cover

13.2 times

Source: Morningstar, Digital Look, Shire.

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

Criteria

Comment

Score

Longevity

Shire has only been around 26 years.

2/5

Performance vs. FTSE

Impressive so far, but fast growth is often a bumpy ride.

4/5

Financial strength

Shire is generating plenty of cash and has growing margins.

4/5

EPS growth

Earnings have grown fast.

4/5

Dividend growth

High dividend growth, but yield remains very low.

2/5

Total: 16/25

Shire's progress in recent years has been outstanding, but the best-laid plans can go awry, and Shire's plans were upset earlier this year when the U.S. Food & Drug Administration unexpectedly granted a license to a Swiss company to sell a cheaper generic alternative to one of its main products, the ADHD drug Adderall XR. Shire wasn't expecting this to happen until 2014 and consequently faces a sales shortfall while it continues to develop the market for its newer, patent-protected ADHD drugs.

This is only likely to be a blip in Shire's progress but it does highlight the bigger problem with Shire for retirement investors. Shire is still very much a growth company -- its short history, 0.5% dividend yield, high dividend cover, and P/E ratio of 18 all highlight this, and in my view, mean that it is not suitable as a retirement investment, despite a respectable score of 16/25.

Top income picks
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 shares in Shire or AstraZeneca. 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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