I pick the five worst contenders so far in my hunt for the best FTSE 100 retirement shares.
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 UK 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 UK 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 all of the companies I've covered so far on this page).
In this article I'm going to introduce the five lowest-scoring shares so far -- G4S (LSE: GFS), BP (LSE: BP)(NYSE: BP.US), Legal & General (LSE: LGEN), SSE (LSE: SSE) and Rio Tinto (LSE: RIO)(NYSE: RIO.US).
First, let's take a look at how each of them scored against my five key retirement share criteria:
|Criteria||G4S||BP||Legal & General||SSE||Rio Tinto|
|Performance vs. FTSE||3/5||3/5||3/5||4/5||3/5|
Not really that bad?
The first thing that these companies have in common is that they are not bad companies. The lowest score, 15/25 for G4S, equates to 60% -- hardly a disaster. However, each company does have at least one weakness that prevented it achieving a coveted 20+ score.
I do not think that G4S's Olympic failure will have a significant effect on the company's ongoing fortunes, which look likely to be bolstered by ongoing emerging market growth. However, I do think it might struggle to grow earnings as fast as it has done previously. The company's half-year results, published today, showed a modest increase in revenue and broadly flat operating profits. However, its pre-tax profits were down heavily on the same period last year, falling from £151m to £61m, following the £50m Olympic contract loss and other exceptional items. G4S also has quite a lot of debt; net finance costs for the last six months were £54m, accounting for 22% of its operating profits.
Oil supermajor BP is very much a company in transition. Over the last couple of years, it has had to deal with the Gulf of Mexico oil spill, has sold numerous assets to raise funds and is currently trying to extricate itself from its profitable but troubled Russian joint venture, TNK-BP. The problem with all of this is that the company's eventual destination remains unclear, and there is a growing body of opinion suggesting BP's top management is not really up to the job of successfully completing this transformation. This is a story that will take several more years to play out, I suspect, hence BP's relatively low score.
Legal & General is one of the oldest companies in the FTSE 100 and a thoroughly solid organisation. Its inclusion in this list is down to two factors; modest growth levels and a failure to outperform the FTSE 100 in recent years. Despite this, I would happily include a chunk of L&G shares in my retirement portfolio, not least because of the attractive 4.9% dividend yield they offer -- a payout level that's been maintained throughout the financial crisis and which should be safe going forwards.
The two top scorers of this bunch, SSE and Rio Tinto, can hardly be said to belong in a 'worst' list. Rio Tinto is one of the top three global miners in the FTSE 100, and as I have written before, currently looks very cheap -- indeed, it's on my buy list for this autumn. The main fear with Rio is that things might get worse before they get better and that earnings growth will tail off in years to come. However, although I expect the company's share price to be volatile as the eurozone crisis plays out, I don't think that Rio will experience this worst-case scenario.
SSE is very nearly a direct opposite of Rio. Highly defensive, counter-cyclical and a generous and devoted dividend payer, its main problem is that it is required to invest huge amounts of its regulated income on improving its services. However, since I wrote my original review, SSE has announced a 9% price increase, which will be unpopular with its customers, but should help ensure that profitability and dividend payments remain in line with expectations.
Learn from the best
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 had £20bn of private investors' funds under management at the end of 2011 -- more than any other City manager.
Mr Woodford's track record is truly outstanding. His dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to the end of December 2011 -- a record few investors can even dream of.
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 Mr 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 UK Share Warren Buffett Loves" -- it's free.
Further investment opportunities:
> Roland owns shares in SSE. He does not own any of the other shares mentioned in this article.