LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered, annuity rates have plunged, and uncertainty has ruled the roost. 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 to protect 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, especially if you keep the shares within a tax-efficient ISA or SIPP.
It's no coincidence that the world's most successful investor, Warren Buffett, prefers such companies. He recently invested in a large FTSE 100
In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE over the long term and support a lower-risk, income-generating retirement fund. Today I'll take a look at Royal Dutch Shell
In this article I've focused on Shell's class "B" shares, which pay dividends in pounds and are most commonly held by U.K. investors. Shell also has class "A" shares -- Royal Dutch Shell
Size matters
Shell is an integrated oil company, which means that on top of extracting oil and gas and selling it on the open market, it also sells refined products like petrol and diesel to consumers. This means that it is not solely dependent on a high oil price to make big profits -- although that certainly helps! The link between profitability and the price of oil also explains why Shell's yearly performance is not directly linked to the FTSE 100:
|
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing 10-year Average |
|
|---|---|---|---|---|---|---|
|
Royal Dutch Shell Total Return |
16.8% |
(17.4%) |
11.2% |
22.7% |
21% |
5.4% |
|
FTSE 100 Total Return |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
6.8% |
Source: Morningstar. Total return is a useful metric for measuring the performance of your shares, as it captures the effects of share price changes 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.
One of Shell's key advantages is that it has the size and engineering ability to take on the very biggest projects, which is increasingly important today. Many new projects -- especially those involving liquefied natural gas -- are massive in scale and complexity and require huge initial outlay.
Although Shell's trailing-10-year average total return is slightly below that of the FTSE 100 as a whole, its financial strength and earnings power make it attractive as a retirement share, as we shall see.
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 Shell shapes up:
The basics
|
Year Founded |
1907 |
|---|---|
|
Market Cap |
140 billion pounds |
|
Net Debt |
14.1 billion pounds |
|
Dividend Yield |
4.7% |
Five-year average financials
|
Operating Margin |
9.1% |
|---|---|
|
Interest Cover |
28.15 times |
|
EPS Growth |
20.6% |
|
Dividend Growth |
10.1% |
|
Dividend Cover |
2.5 times |
Source: Morningstar; Digital Look.
Here's how I've scored Shell on each of these criteria:
|
Criterion |
Comment |
Score (out of 5) |
|---|---|---|
|
Longevity |
Shell's oil trading history stretches back to 1892, and the company merged with Royal Dutch Petroleum in 1907, so it receives full marks in this category. |
5 |
|
Performance vs. FTSE |
Shell's long-term performance is similar to that of the FTSE 100, but its peaks and troughs tend to come at different times from those of the index. This would help to smooth out the performance of a diversified portfolio or retirement fund. |
4 |
|
Financial Strength |
A solid and profitable company with low debt levels and a better credit rating than some European countries. |
5 |
|
EPS Growth |
A strong record of earnings growth at rates well above inflation. |
4 |
|
Dividend Growth |
Dividend growth is inconsistent, and the dividend has remained unchanged for the last three years. However, the yield is attractive, and long-term average dividend growth is well above inflation. |
3 |
|
|
|
Total: 21/25 |
A score of 21 out of 25 is the best yet in this series, and it suggests that Shell is a strong candidate for a retirement fund portfolio. Its ability to grow earnings over the long term is valuable and should provide a dependable dividend income, although you shouldn't expect a consistent increase every year.
Finally, if you are interested in dividend-paying retirement shares, I would strongly suggest you take a look at some of Neil Woodford's choices. Neil is one of the U.K.'s most successful fund managers and specializes in identifying companies with strong income potential. You can find out about eight of Neil's biggest holdings in this free Fool report, "8 Shares Held By Britain's Super Investor," which I strongly recommend.
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:
