Will shares in Legal & General help you build a FTSE-beating retirement fund?
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 the companies I've covered so far on this page).
Today, I'm going to take a look at Legal & General Group (LSE: LGEN), one of the UK's oldest and largest life insurance, savings and investment management companies, with 7 million UK customers and £370bn under management worldwide. Legal & General was one of the first companies to provide Foolish low-cost index trackers and this remains a big part of its business.
A proper blue chip
Although it's been five years since the credit crisis struck, the financial sector continues to attract scandals and accounting losses in equal measure -- so how has Legal & General fared against the FTSE 100?
| Total Return | 2007 | 2008 | 2009 | 2010 | 2011 | Trailing 10 yr avg. |
|---|
| Legal & General | -13.5% | -38.1% | 9.1% | 25.1% | 11.5% | 4.9% |
| FTSE 100 | 7.4% | -28.3% | 27.3% | 12.6% | -2.2% | 7.3% |
Source: Morningstar
(Total return includes 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.)
Legal & General's trailing 10 year average total return is below that of the FTSE 100 but it has proved relatively stable compared to many of its peers and continues to deliver reliable profits -- its half-yearly results, published today, showed a 5% increase in operating profit.
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 Legal & General shapes up:
| Item | Value |
|---|
| Year founded | 1836 |
| Market cap | £7.7bn |
| Net debt (cash) | (£14bn) |
| Dividend Yield | 4.9% |
| 5 year average financials |
|---|
| Operating margin | 7.9% |
| Interest cover | n/a |
| EPS growth | -14.2% |
| Dividend growth | 3.7% |
| Dividend cover | 1.95x |
Source: Morningstar, Digital Look, Legal & General
Here's how I've scored Legal & General on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | Nearly 200 years of continuous trading. | 5/5 |
| Performance vs. FTSE | Recently a strong performer against the FTSE. | 3/5 |
| Financial strength | Strong cash generation and plenty of net cash mean it can ride out most storms. | 4/5 |
| EPS growth | A return to EPS growth is expected this year. | 2/5 |
| Dividend growth | L&G's dividends have just about kept pace with inflation over the last five years. | 3/5 |
Total: 17/25 |
A score of 17/25 reflects the risk premium attached to financial shares at the moment but suggests that Legal & General could be a good candidate for a retirement fund portfolio, especially over the longer term -- a £7bn company that has survived independently and profitably for 176 years is likely to continue to do so.
An expert's choice?
Another 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 have outperformed the wider index by a staggering 305% over the last 15 years.
You can learn about Neil Woodford's top holdings and 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.
Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!
Further investment opportunities:
> Roland does not own shares in Legal & General.
