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 of things improving 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 of protecting yourself from the downturn 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 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'm going to take a look at HSBC Holdings (ISE: HSBA.L) , my favorite pick from the U.K.'s big banks. HSBC's name has been dragged through the mud this week, thanks to revelations that it was heavily involved in laundering Mexican drug money, but I don't think this changes the fundamental appeal of the business.
One of the things I most like about HSBC is its combination of U.K. and emerging-markets exposure. It has particular strengths in Asia, its historical base, and this has helped it outperform the U.K.'s other big banks throughout the last few years. Unfortunately, it hasn't managed to outperform the FTSE 100:
Trailing 10-Year Avg.
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.
The trailing-10-year average total return is below that of the FTSE 100, but is fairly respectable considering the scale of the financial crisis we are going through. By way of comparison, Barclays, which also avoided a government bailout, has a 10-year average trailing total return of -3.7%.
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 HSBC shapes up:
99.6 billion pounds
Operating Margin (5-year average)
Interest Cover (5-year average)
EPS Growth (5-year average)
Dividend Growth (5-year average)
Dividend Cover (5-year average)
Source: Morningstar, Digital Look.
Here's how I've scored HSBC on each of these criteria:
HSBC's 147-year history places it near the top of the pile.
Performance vs. FTSE
It has held its own against the financial crisis, but still suffered.
One of the better-funded banks, it's unlikely to have problems.
Recovering steadily and promising a more focused, profitable future.
Cuts in recent years lose points, but overall a good record and an attractive yield.
A score of 19/25 is impressive and suggests that HSBC is a candidate for a retirement fund portfolio. Its combination of Asian strength and attractive yield is particularly tempting and it's a share I hold myself. However, the eurozone crisis means that European banks remain risky, so you may want to consider some alternative ideas.
One way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager and sold out of banking shares well before the credit crunch hit home. Neil Woodford's 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 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 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 HSBC the Ultimate Retirement Share? originally appeared on Fool.com.
Roland owns shares in HSBC Holdings but does not own shares in Barclays.The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.