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 of things improving anytime soon, either, as the eurozone and the UK 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 all of the companies I've covered so far on this page).

Over the last week or so, I've looked at Admiral Group (LSE: ADM.L  ) , Associated British Foods (LSE: ABF.L  ) , Aggreko (LSE: AGK.L  ) , Pearson (LSE: PSON.L  ) and Shire (LSE: SHP.L  ) . Let's take a look at how each of them scored against my five key retirement share criteria:

Criteria Shire Admiral Group Aggreko Associated British Foods Pearson
Longevity 2/5 2/5 3/5 4/5 4/5
Performance vs. FTSE 4/5 3/5 5/5 4/5 4/5
Financial strength 4/5 4/5 4/5 4/5 4/5
EPS growth 4/5 4/5 5/5 4/5 3/5
Dividend growth 2/5 4/5 3/5 4/5 5/5
Total 16/25 17/25 20/25 20/25 20/25

Shire
Shire's market-leading attention deficit hyperactivity disorder (ADHD) drugs have made shareholders a lot of money over the years, but this fast-growing young company was wrong-footed earlier this year when the U.S. Food and Drug Administration granted a license to a Swiss competitor to sell a generic alternative to Shire's Adderall XR one year earlier than expected.

Shire has a new, patent-protected ADHD drug in place, but it is still relatively new to the market, resulting in a likely sales shortfall for the company this year. My conclusion was that while Shire remains a good quality company, it is still very much a low-income growth investment and not yet suitable for dividend-focused retirement investing.

Admiral Group
Admiral is a well-known name in British car insurance and also runs the confused.com price comparison website. In my original article I said that I thought its impressive profit margins could come under pressure.

A few days later, the company published an interim management statement in which it admitted that U.K. car insurance turnover had dropped by 5% in the third quarter. Commenting on the results, Chief Executive Henry Engelhardt said:

The UK car insurance market is cyclical and we are in the softer part of the cycle with premium rates coming down. We believe that the sensible strategy in this part of the cycle is to slow our rate of growth.

The news wiped 10% off Admiral's share price, and while its forward dividend yield of 8.1% is attractive, it depends on a special dividend. I prefer insurance peers Aviva and RSA Insurance, which offer similar yields from their regular dividends and have been in business for much longer than Admiral.

Aggreko
Temporary power specialist Aggreko has lost a little of its luster recently, joining a clutch of growth shares that show signs of beginning the sometimes-painful transition to more mature "stalwarts." Like Admiral, Aggreko shed almost 10% of its value after its latest trading statement, which warned that profits for the year are likely to be around 2.5% lower than expected, thanks to lower growth rates, higher costs, and an increase in bad debt provisions.

My feeling is that there could be more bad news to come -- and with a dividend yield of 1% and a price to earnings ratio of 24.1, Aggreko is not yet a retirement share.

Associated British Foods
Associated British Foods is mixed group of businesses that includes British Sugar, Primark, and consumer food brands such as Twinings and Ovaltine. These all make a sound contribution to profits, which rose by 17% on an adjusted basis in the company's last fiscal year.

Although ABF only yields 2.1%, it has increased its dividend every year since at least 1993, giving it an impressive record of dividend growth that could provide a very attractive foundation for a retirement income portfolio. ABF's share price has already risen by 25% this year, but its current P/E of 15.9 remains on a level with the FTSE 100 average, and I think it is a superior business that could be worth considering as a retirement share.

Pearson
Best known to investors as the publisher of the Financial Times, Pearson's main business is educational publishing. It also owns the publisher Penguin and recently agreed to enter into a joint venture with Random House, a leading competitor. Pearson's educational business accounts for 75% of its revenue and profits and the company has an excellent record of dividend growth, meaning it could be worth a closer look as a potential retirement share.

An expert tip
Although doing your own research is important, one way of identifying great dividend-paying shares is to study the choices of successful professional investors.

Someone who really understands how to pick shares that deliver sustainable dividend growth is City is fund manager Neil Woodford, whose dividend stock picks outperformed the wider index by a staggering 305% over the 15 years to December 31, 2011. Thanks to his impressive track record, Woodford had 20 billion pounds of private investors' money under management at the end of January 2012 -- more than any other City manager.

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 click here to download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Roland Head owns shares in Aviva but does not own shares in any of the other companies 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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