Are These the 5 Best Retirement Shares in the FTSE?

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 all of the companies I've covered so far on this page).

Over the few weeks, I've looked at fifteen shares, and in this article I'm going to examine the five top-scoring shares so far -- Rolls-Royce Holdings (LSE: RR.L), Serco Group (LSE: SRP.L), Hargreaves Lansdown (LSE: HL.L), BG Group (LSE: BG.L) and AstraZeneca (LSE: AZN.L).

First, let's take a look at how each of them scored against my five key retirement share criteria:

Flying high
There's no doubt that Rolls-Royce is flying high at the moment. Its aero engine business is a world leader and the global airline market looks likely to continue to expand over the next decade or so. At the same time, Rolls' energy and maritime divisions are benefiting from the sustained high oil prices that are driving a boom in oil and gas exploration. The only downside for newcomers to the shares are that they are now beginning to look a little expensive, with a P/E of 17.5 and a dividend yield of just 2.1%. Rolls is a high-quality company, but I might be tempted to wait for a spell of weakness before buying into this British engineering success story.

Outsourcing group Serco scored an equal-best 21/25, placing it alongside Rolls-Royce at the top of this review. Serco's strengths include its long relationship with the Ministry of Defense and its growing ability to move up the value chain, offering higher-level services and more complete solutions than in the past. The company's other major hope for growth is its expansion into emerging markets, where public sector outsourcing is in its infancy and offers huge expansion potential. Possible risks for the company include margin pressures, as it is forced to compete on price for new work. A slowdown in earnings growth is expected by analysts for the current year, and while Serco's yield is low, it has a solid history of dividend increases and could deliver attractive yield on cost gains over the long term.

Hargreaves Lansdown has been an undoubted success story and is perhaps one financial business that has benefited from the recession and the eurozone crisis. Much of its income comes from trading fees paid by its customers -- private investors -- and these could decline if market conditions stabilize and return to normal in future years. There is also a question over how the outcome of the Retail Distribution Review will affect the company. Hargreaves Lansdown is an attractive business, but its P/E of 26 looks expensive and it may have to adapt to changed circumstances over the next few years.

BG Group's fantastic performance against the FTSE 100 has delivered great returns to early shareholders, but newcomers to the stock might have to settle for more modest gains, which I believe will be driven by the group's leading position in the global LNG market. How this market evolves -- and whether prices remain high -- will affect BG's fortunes over the next couple of decades.

The professional choice
The final share in this selection is AstraZeneca, a company that's looking for new products and needs them faster than it can develop them, which could result in a spree of acquisitions. The company's shares currently trade at a heavy discount to those of U.K. sector peer GlaxoSmithKline, with a P/E of just 6.6 -- about half that of GSK.

One successful professional investor who has big holdings in both AstraZeneca and GlaxoSmithKline is City fund manager Neil Woodford, whose dividend stock picks outperformed the wider index by a staggering 305% in the 15 years ending Dec. 31, 2011.

Woodford is one of the most successful income investors currently working in the City and had 20 billion pounds of private investors' funds under management at the end of January 2012 -- more than any other City manager.

You can learn about all eight of Neil Woodford's top holdings and see 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.

Buffett buy signal! The billionaire investor has found an attractive large-cap right here in Britain! Discover what he bought and the price he paid in this special report -- "The One U.K. Share Warren Buffett Loves" -- it's free.

Further investment opportunities:

• Ten Steps To Making A Million In The Market
• Top Sectors Of 2012
• Here's How I Hope To Retire