Will shares in British Land 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 any time 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 British Land (LSE: BLND), the UK's second-largest real estate investment trust (REIT). British Land's portfolio is focused on Central London offices and retail premises and is of a high quality, with long leases and high occupancy rates. But is it a retirement share?
Paying the rent
British Land's share price is correlated to the value of its property portfolio, which inflated massively before collapsing during the credit crunch. As a result, it has underperformed the FTSE 100 over the last 10 years:
| Total return | 2007 | 2008 | 2009 | 2010 | 2011 | Trailing 10-yr avg. |
|---|
| British Land | -43.5% | -38.6% | -7.7% | 14.7% | -7.4% | 3.8% |
| 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.)
British Land's exposure to one of the biggest property bubble's in history has harmed its total returns, but its £10bn portfolio remains highly attractive and income generative -- and London property prices have recovered far more strongly than anywhere else in the UK.
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 British Land shapes up:
| Item | Value |
|---|
| Year founded | 1856 |
| Market cap | £4.8bn |
| Net debt | £2.5bn |
| Dividend Yield | 4.8% |
Five-year average financials |
| Operating margin | 22.8% |
| Interest cover | 2.2x |
| EPS growth | -1.8% |
| Dividend growth | 16.7% |
| Dividend cover | 0.7x* |
Source: Morningstar, Digital Look, British Land
*As a REIT, British Land is required by law to distribute 90% of its tax-exempt profits as dividends, so dividend cover is never going to be high.
Here's how I've scored British Land on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | One of the oldest and largest London property companies. | 5/5 |
| Performance vs FTSE | Could do better. | 3/5 |
| Financial strength | Profitable, positive cash flow and plenty of liquid assets. | 4/5 |
| EPS growth | Dire, but things should now improve. | 2/5 |
| Dividend growth | Good yield and growth -- an income investment. | 4/5 |
Total: 18/25 |
A score of 18/25 is fairly respectable, especially given that the UK market is still recovering form a big property bubble. I think that British Land could be a worthwhile addition to a retirement portfolio, given its strong income element and solid central London assets -- which are always likely to be more resilient than commercial property elsewhere in the UK.
An alternative to property
If you're not keen on property, then 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 British Land.
