Is BAT the Ultimate Retirement Share?

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LONDON -- 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 that matters will improve anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way to protect yourself from the downturn, however, is to build 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 U.K. large caps that have the potential to beat the FTSE 100 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'll take a look at British American Tobacco (ISE: BATS.L) , the world's second-largest tobacco company and a favored share among dividend investors (including Neil Woodford), thanks to its high profits and its policy of paying out 65% of earnings as dividends.

Smoking performance?
The addictive nature of their products makes tobacco companies good defensive shares; they perform well in a downturn. BAT has proved the truth of this by comprehensively outperforming the FTSE 100 over the last 10 years:

 

2007

2008

2009

2010

2011

Trailing 10-Year Average

British American Tobacco Total Return

41.6%

(4.8%)

17%

27.4%

28.9%

19.7%

FTSE 100 Total Return

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.1%

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.

BAT has by far the best trailing 10-year average total return I have seen so far in this series, totally eclipsing the performance of the FTSE 100. This is the result of a combination of strong share price performance and solid dividend increases.

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 BAT shapes up:

The basics

Year Founded

1902

Market Cap

64 billion pounds

Net Debt

8.1 billion pounds

Dividend Yield

3.9%

Five-year average financials

Operating Margin

32.1%

Interest Cover

9.3 times

EPS Growth

11.4%

Dividend Growth

19.7%

Dividend Cover

1.75 times

Source: Morningstar, Digital Look, British American Tobacco.

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

Criterion

Comment

Score (out of 5)

Longevity

More than a century in the same business can't be bad.

5

Performance vs. FTSE

Outstanding performer, especially in bad times.

5

Financial Strength

Generous interest cover and high returns, but high gearing as well.

3

EPS Growth

Strong brands and emerging markets have driven impressive growth.

4

Dividend Growth

A well-defined and generous dividend policy has delivered excellent growth, although this has slowed slightly.

4

 

 

Total: 21/25

A score of 21 highlights why British American Tobacco may be a strong candidate for a retirement fund portfolio -- something that leading fund manager Neil Woodford agrees with.

Woodford beats the market
City investor Neil Woodford manages more funds for private investors than any other fund manager, with a whopping 20 billion pounds of our money under his watch. Over the last 15 years, Woodford's stock picks have risen in value by a staggering 347% during a period in which the wider market only gained 42%.

British American Tobacco is just one of Neil Woodford's eight biggest holdings. If you would like to know about all eight of his biggest holdings, this free report covers all eight of them and why he bought them. Don't delay -- "8 Shares Held By Britain's Super Investor" is completely free and available for a limited time only, so I suggest you download it immediately.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

The article Is BAT the Ultimate Retirement Share? originally appeared on Fool.com.

Roland does not own shares in British American Tobacco. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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