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, 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 U.K. 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 Hargreaves Lansdown (ISE: HL.L) , one of the largest fund supermarket and investment management services in the U.K. and a company that has proved to be an excellent investment in its own right.
Setting an example
Hargreaves Lansdown only floated on the stock market in 2007 but has outperformed the FTSE 100 since then, as these figures show:
Trailing 5-Year Avg.
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.
Anyone investing in Hargreaves Lansdown shares shortly after the company's flotation five years ago will now be sitting on a total return of 26.2% -- a considerable improvement over the 1.5% managed by the FTSE 100 (including dividends) over the same period. The question for today's retirement investors is whether Hargreaves Lansdown can maintain its strong performance and profitability over the long term.
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 Hargreaves Lansdown shapes up:
3 billion pounds
122 million pounds
5-year average financials
Source: Morningstar, Digital Look, Hargreaves Lansdown.
Here's how I've scored Hargreaves Lansdown on each of these criteria:
Still a relative youngster.
Performance vs. FTSE
No complaints so far, but it's still early days.
Net cash and very high profit margins provide a margin of safety.
Very strong, albeit over a relatively short (reported) period.
Excellent growth rate highlights cash generative nature of business.
A score of 20/25 is impressive and suggests that Hargreaves Lansdown could be a strong candidate for a retirement fund portfolio.
Despite this, there are a few potential risks for retirement investors to consider. Companies like Hargreaves Lansdown make money from fund sales and from trading activity. Although it has grown aggressively since it listed on the LSE in 2007, Hargreaves has benefited from a period of financial turmoil that has attracted numerous new investors and generated a lot of short-term activity. These conditions could reverse in future years, reducing its income.
Hargreaves is also an expensive share, currently trading at 26 times earnings and close to its all-time high. I would be tempted to wait for a period of weakness before buying in, but that might be a long time coming given the quality of the company's 2011/12 results. Published today, they revealed that pre-tax profits rose by 21% last year, while customer account numbers were up 11% and assets under administration grew by 7%.
Doing your own research is important, but another good 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 outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.
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.
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Further investment opportunities:
Roland does not own shares in Hargreaves Lansdown. The Motley Fool owns shares in Hargreaves Lansdown.
The article Is Hargreaves Lansdown the Ultimate Retirement Share? originally appeared on Fool.com.
The Motley Fool owns shares of HL.L. 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.
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