Will shares in Royal Dutch Shell help you build a FTSE-beating retirement fund?
The last five years have been tough for those in retirement. Portfolio valuations have been hammered, annuity rates have plunged and uncertainty has ruled the roost. 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, especially if you keep the shares within a tax-efficient ISA or SIPP.
It's no coincidence that the world's most successful investor, Warren Buffett, prefers such companies, and recently invested in a large FTSE 100 (UKX) company that fits the bill perfectly -- you can find full details in this free report.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE over the long term and support a lower-risk income-generating retirement fund. Today, I'm going to take a look at Royal Dutch Shell (LSE: RDSB), whose £140bn market capitalisation makes it the largest company in the FTSE 100 and one of the world's five 'supermajor' oil companies.
In this article I've focused on Shell's class B shares, which pay dividends in pounds and are most commonly held by UK investors. Shell also has class A shares -- Royal Dutch Shell (LSE: RDSA) -- which are virtually identical but pay dividends in euros. The total value of these two types of share gives Shell its £140bn market cap.
Shell is an integrated oil company, which means that as well as extracting oil and gas and selling it on the open market, it also sells refined products like petrol and diesel to consumers. This means that it is not solely dependent on a high oil price to make big profits, although this certainly helps! The link between profitability and the price of oil also explains why Shell's yearly performance is not directly linked to the FTSE 100:
|Total Return||2007||2008||2009||2010||2011||Trailing 10 yr avg.|
|Royal Dutch Shell||16.8%||-17.4%||11.2%||22.7%||21.0%||5.4%|
(Total return is a useful metric for measuring the performance of your shares, as it captures the effects of share price changes 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.)
One of Shell's key advantages is that it has the size and engineering ability to take on the very biggest projects, something that is increasingly important today. Many new projects -- especially those involving LNG -- are massive in scale and complexity, and require huge initial outlay.
Although Shell's trailing 10 year average total return is slightly below that of the FTSE 100 as a whole, Shell's financial strength and earnings power makes it attractive as a retirement share, as we shall see.
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 Shell shapes up:
|5 year average financials|
Source: Morningstar, Digital Look
Here's how I've scored Shell on each of these criteria:
|Longevity||Shell's oil trading history stretches back to 1892 and the company merged with Royal Dutch Petroleum in 1907, so full marks in this category.||5/5|
|Performance vs. FTSE||Shell's long-term performance is similar to that of the FTSE 100 but its peaks and troughs tend to come at different times to those of the index. This will help to smooth out the performance of a diversified portfolio or retirement fund.||4/5|
|Financial strength||A solid and profitable company with low debt levels and a better credit rating than some European countries.||5/5|
|EPS growth||A strong record of earnings growth at rates well above inflation.||4/5|
|Dividend growth||Dividend growth is inconsistent and the dividend has remained unchanged for the last three years. However, the yield is attractive and longer-term average dividend growth is well above inflation.||3/5|
A score of 21/25 is the best yet in this series, and suggests that Shell is a strong candidate for a retirement fund portfolio. Its ability to grow earnings over the long-term is valuable and should provide a dependable dividend income, although you shouldn't expect a consistent increase every year.
Finally, if you are interested in dividend-paying retirement shares, I would strongly suggest you take a look at some of Neil Woodford's choices. Neil is one of the UK's most successful fund managers and specialises in identifying companies with strong income potential. You can find out about eight of Neil's biggest holdings in this free Fool report, "8 Shares Held By Britain's Super Investor", which I strongly recommend, as many of Neil's picks are excellent retirement shares.
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 owns shares in Royal Dutch Shell.