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 look at BHP Billiton
Cast-iron profits
Like its contemporary Rio Tinto, much of BHP's revenue and profits comes from iron ore, the market for which has boomed in recent years. Let's see how BHP has performed against the FTSE 100 over the last 10 years:
|
Total Return |
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing 10-Year Avg. |
|---|---|---|---|---|---|---|
| BHP Billiton | 68% | (13.9%) | 58.3% | 30.6% | (23.9%) | 22% |
| FTSE 100 | 7.4% | (28.3%) | 27.3% | 12.6% | (2.2%) | 6.8% |
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.)
BHP's stunning trailing-10-year average total return is more than three times that of the FTSE 100 -- and although it is unlikely to be able to sustain this performance over the next decade, its quality assets, high margins and substantial market share should enable it to continue to deliver solid earnings and profits.
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 BHP Billiton shapes up:
|
Item |
Value |
|---|---|
| Year founded | 2001* |
| Market cap | 41 billion pounds |
| Net debt | 3.6 billion pounds |
| Dividend yield | 3.6% |
|
5-Year Average Financials |
|
| Operating margin | 39.5% |
| Interest cover | 39.3 times |
| EPS growth | 40.4% |
| Dividend growth | 28.9% |
| Dividend cover | 4.1 times |
Source: Morningstar, Digital Look, BHP Billiton. *BHP Billiton was created when two 19th-century mining companies, Broken Hill Proprietary and Billiton, merged.
Here's how I've scored BHP Billiton on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
| Longevity | A recent merger of two old companies. |
3/5 |
| Performance vs. FTSE | It has delivered the goods. |
5/5 |
| Financial strength | Low gearing but negative net cash flow in 2011. |
3/5 |
| EPS growth | Expect a slowdown compared to the last five years. |
3/5 |
| Dividend growth | A decent growth record and the highest yield of the big miners. |
4/5 |
|
Total: 18/25 |
A score of 18/25 is solid and respectable and suggests that BHP Billiton could be a strong candidate for a retirement fund portfolio. Although the global commodities market is slowing down, it is unlikely to go into reverse and major markets such as China are continuing to grow, albeit at a reduced rate.
Although BHP Billiton is cyclical, its share price is currently more than 20% below its 2010 peak and now could be a good time to buy for anyone seeking to hold over the very long term. Over time, anyone buying BHP shares now should benefit from steady yield on cost gains, making it an ideal share to hold in a retirement portfolio.
Expert selections
Although your own research is important, 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 347% during the 15 years to Dec. 31 2011.
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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Further investment opportunities
