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 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.
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'll take a look at BP
A rocky road?
Here's how BP has performed relative to the FTSE 100 over the last 10 years:
|
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing 10-Year Average |
|
|---|---|---|---|---|---|---|
|
BP Total Return |
12.1% |
(9.8%) |
21% |
(21%) |
2.7% |
3% |
|
FTSE 100 Total Return |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
6.9% |
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.
BP's disastrous 2010 lets down its overall returns, but it's easy to see that if the Gulf of Mexico hadn't happened, BP's performance would be well ahead of the FTSE 100 on a 10-year trailing average basis.
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 BP shapes up:
|
Year founded |
1908 |
|
Market Cap |
81 billion pounds |
|
Net Debt |
19.4 billion pounds |
|
Dividend Yield |
4.2% |
|
5-Year Average Financials |
|
|
Operating Margin |
6.3% |
|
Interest Cover |
21.1 times |
|
EPS Growth |
2% |
|
Dividend Growth |
3.3% |
|
Dividend Cover |
2.2 times |
Sources: Morningstar; Digital Look.
Here's how I've scored BP on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
|
Longevity |
One of the original pioneers of oil exploration in the Middle East. |
5 |
|
Performance vs. FTSE |
Has the potential but hasn't delivered in recent years. |
3 |
|
Financial Strength |
Remains strong financially despite its problems. |
3 |
|
EPS Growth |
BP is still in transition and isn't delivering consistent growth. |
2 |
|
Dividend Growth |
Erratic growth, but a solid yield and appropriate level of cover. |
3 |
|
|
|
Total: 16/25 |
A score of 16 out of 25 reflects the fact that BP is going through a transition. Costs are still ongoing from the Gulf of Mexico, and although it wants to sell its stake in TNK-BP, I'm not sure it has a clear plan to replace this income. Despite this, in the long term I believe it will recover and could be a good candidate for a retirement fund portfolio.
Expert selections
Another 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 manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years.
You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. It's 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.
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Further investment opportunities:
