Is BP 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 things 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 BP (ISE: BP.L) , a company that used to be bigger than Royal Dutch Shell 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:

 

2007

2008

2009

2010

2011

Trailing 10-Year Average

BP Total Return

12.1%

(9.8%)

21%

(21%)

2.7%

3%

FTSE 100 Total Return

7.4%

(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 founded

1908

Market Cap

81 billion pounds

Net Debt

19.4 billion pounds

Dividend Yield

4.2%

Operating Margin

6.3%

Interest Cover

21.1 times

EPS Growth

2%

Dividend Growth

3.3%

Dividend Cover

2.2 times

Sources: Morningstar; Digital Look.

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

Criteria

Comment

Score

Longevity

One of the original pioneers of oil exploration in the Middle East.

5

Performance vs. FTSE

Has the potential but hasn't delivered in recent years.

3

Financial Strength

Remains strong financially despite its problems.

3

EPS Growth

BP is still in transition and isn't delivering consistent growth.

2

Dividend Growth

Erratic growth, but a solid yield and appropriate level of cover.

3

 

 

Total: 16/25

A score of 16 out of 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 to identify 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. It's 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 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 BP the Ultimate Retirement Share? originally appeared on Fool.com.

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

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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