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 (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at Prudential
Insurance masterclass?
Like all financial shares, Prudential was hit hard by the credit crunch, but unlike some of its peers, it has rebounded strongly and performed well against the FTSE 100 since then:
|
Total Return |
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing 10-Year Avg. |
|---|---|---|---|---|---|---|
| Prudential |
4.3% |
-38.9% |
58.4% |
7.5% |
-4.4% |
11.5% |
| FTSE 100 |
7.4% |
-28.3% |
27.3% |
12.6% |
-2.2% |
8.1% |
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.)
Prudential's trailing 10-year average total return is highly impressive and suggests the group's strategy of expanding into Asia is delivering strong growth.
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 Prudential shapes up:
|
Item |
Value |
|---|---|
| Year founded |
1848 |
| Market cap |
21.1 bn pounds |
| Net debt |
n/a |
| Dividend Yield |
3.3% |
| Operating margin | 4.7% |
| Interest cover | n/a |
| EPS growth | 10.8% (adj.) |
| Dividend growth | 9.2% |
| Dividend cover | 1.8x |
Source: Morningstar, Digital Look, Prudential.
Here's how I've scored Prudential on each of these criteria:
Criteria | Comment | Score |
|---|---|---|
| Longevity | A true blue chip. | 5/5 |
| Performance vs. FTSE | Surprisingly good. | 4/5 |
| Financial strength | In good health, albeit vulnerable to big market shocks. | 4/5 |
| EPS growth | Asian and U.S. growth is fueling earnings. | 4/5 |
| Dividend growth | Dividend growth is keeping pace with earnings growth. | 4/5 |
Total: 21/25 |
Prudential has distinguished itself from its U.K. peers Aviva and RSA Insurance by switching its focus to Asian markets, where it has been able to achieve growth far ahead of what is possible in moribund U.K. and Western European markets. Nearly 80% of its profits now come from outside the U.K., and the Pru's latest move is into the U.S. market, where it has been expanding fast with the help of the acquisition of Reassure American Life Insurance Company, which it purchased for 398 million pounds in May.
On the face of it, the Pru's score of 21/25 is thoroughly deserved and suggests that the share could make a strong long-term contribution to a retirement fund portfolio. Although it is more expensive on a P/E basis than its U.K.-focused peers, it remains at a substantial discount to the FTSE 100 average and I think its future growth prospects, and the profitable plateau which should eventually follow, justify the price difference.
Expert selections
Doing your own research is important, but 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. Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 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.
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:
- Here's How I Hope to Retire
- 10 Steps to Making a Million in the Market
- 8 Shares Held by Britain's Super Investor
Roland owns shares in Aviva but does not own any of the other shares mentioned in this article.
