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 (UKX) over the long term and support a lower-risk income-generating retirement fund.
Today, I'm going to take a look at Standard Chartered (LSE: STAN.L), a London-listed bank that does the vast majority of its business in Asia, the Middle East, and Africa.
Unblemished record?
Standard Chartered's overseas focus means it has escaped the worst of the effects of the credit crunch and has remained profitable and focused on growth. This has helped it perform strongly against the FTSE 100 over the last 10 years:
|
Total Return |
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing 10-Year Average |
|---|---|---|---|---|---|---|
| Standard Chartered | 26.1% | (51.0%) | 84.8% | 12.4% | (15.8%) | 10.9% |
| FTSE 100 | 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.
Standard Chartered's trailing 10-year average total return shows that it has delivered superior returns to the FTSE 100 despite the credit crunch -- an achievement that no other U.K. bank, not even its Asian peer HSBC Holdings, has managed. A sharp downturn in Asia could hurt it more than other major U.K. banks, but good cost control and profitability should help protect it.
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 Standard Chartered shapes up:
|
Item |
Value |
|---|---|
| Year founded | 1969* |
| Market cap | 36 billion pounds |
| Net debt | N/A |
| Dividend Yield | 3.3% |
| 5-Year Average Financials | |
| Operating margin | 23.4% |
| Interest cover | N/A |
| EPS growth | 11.0% |
| Dividend growth | 7.6% |
| Dividend cover | 2.8 times |
Source: Morningstar, Digital Look, Standard Chartered. *Standard Chartered was formed when Standard Bank and Chartered Bank merged. Both had been in business since the mid-19th century.
Here's how I've scored Standard Chartered on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
| Longevity | More than 150 years of banking experience in Asia, the Middle East, and Africa. | 5/5 |
| Performance vs. FTSE | Strong performer against the FTSE, has also avoided LIBOR and other scandals that have afflicted its U.K. peers. | 4/5 |
| Financial strength | More profitable than many and with diversified income. | 4/5 |
| EPS growth | Earnings growth is respectable and should be sustainable. | 4/5 |
| Dividend growth | A lower yield than some but healthy growth and sensible levels of cover. | 3/5 |
|
Total: 20/25 |
Standard Chartered released its interim results today, and CEO Peter Sands commented that "we see some virtue in being boring." This philosophy could work well for a retirement portfolio and a score of 20/25 suggests that dull but reliable Standard Chartered could be an excellent candidate for a retirement fund portfolio.
Expert selections
Banking shares -- including Standard Chartered -- collapsed in value when the credit crunch struck in 2008. However, the warning signs were there and one investor who paid attention and sold all of his banking shares before prices fell was city manager Neil Woodford, who manages 20 billion pounds of private investors' money.
Woodford's skilled and careful approach is one of the reasons that his dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years. He is still cautious about banking stocks and prefers to put his money elsewhere. At the last count, eight shares in three key sectors accounted for a massive 47% of his funds.
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.
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