Is BP The Ultimate Retirement Share?

Published in Company Comment on 31 July 2012

Will shares in BP 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 BP (LSE: BP), a company that used to be bigger than Royal Dutch Shell (LSE: RDSB) but which is still recovering from its Gulf of Mexico disaster in 2010 and is in the throes of negotiating an exit from its profitable but troubled Russian joint venture, TNK-BP.

A rocky road?

Here's how BP has performed relative to the FTSE 100 over the last 10 years:

Total Return20072008200920102011Trailing 10 yr avg.
FTSE 1007.4%-28.3%27.3%12.6%-2.2%6.9%

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.)

BP's disastrous 2010 lets down its overall returns, but it's easy to see that if the Gulf of Mexico hadn't happened, BP's performance would be well ahead of the FTSE 100 on a 10-year trailing average basis.

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 BP shapes up:

Year founded1908
Market cap£81bn
Net debt£19.4bn
Dividend Yield4.2%
5 year average financials
Operating margin6.3%
Interest cover21.1x
EPS growth2.0%
Dividend growth3.3%
Dividend cover2.2x

Source: Morningstar, Digital Look

Here's how I've scored BP on each of these criteria:

LongevityOne of the original pioneers of oil exploration in the Middle East.5/5
Performance vs. FTSEHas the potential but hasn't delivered in recent years.3/5
Financial strengthRemains strong financially despite its problems.3/5
EPS growthBP is still in transition and isn't delivering consistent growth.2/5
Dividend growthErratic growth but a solid yield and appropriate level of cover.3/5

Total: 16/25

A score of 16/25 reflects the fact that BP is going through a transition. Costs are still ongoing from the Gulf of Mexico and although it wants to sell its stake in TNK-BP, I'm not sure it has a clear plan to replace this income. Despite this, in the long term I believe it will recover and could be a good candidate for a retirement fund portfolio.

Expert selections

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.

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Further investment opportunities:

> Roland owns shares in Royal Dutch Shell. He does not own shares in BP.

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StFual 31 Jul 2012 , 12:14pm

BP have now become the cash cow for every electioneering American politician,Russian mob boss and green activist, to milk dry. The idea that BP will be treated fairly in an election year in the United States when complete states can be bought with payouts funded by BP is ridiculous.

The rest of the world looks after their own first why don't the British.
It is about time the British government stepped in and started penalising all non-British companies operating in the North Sea. If British companies are not going to be treated fairly abroad we should hand out the same treatment in the UK .

If BP arent going to be treated fairly then they should sell out to the Russians, Chinese or Americans who have enough muscle to manage a large oil company in todays litigious world.

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