Are These the Five Best Retirement Shares in the FTSE?

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 over the long term and support a lower-risk income-generating retirement fund (you can see all of the companies I've covered so far on this page).

Over the last few weeks, I've looked at fifteen shares and in this article I'm going to examine the five top-scoring shares so far -- Prudential (ISE: PRU.L) , Reckitt Benckiser Group (ISE: RB.L) , Compass Group (ISE: CPG.L) , Imperial Tobacco (ISE: IMT.L) and J Sainsbury (ISE: SBRY.L) .

First, let's take a look at how each of them scored against my five key retirement share criteria:

CriteriaSainsburyImperial TobaccoCompass GroupReckitt BenckiserPrudential
Performance vs. FTSE3/55/54/55/54/5
Financial strength4/53/54/54/54/5
EPS growth4/53/54/54/54/5
Dividend growth4/54/55/54/54/5

A mini portfolio?
There's no doubt that these five are all high-quality companies; you probably wouldn't go far wrong if you bought all of them for your retirement portfolio. However, as always, each company had its own individual attractions.

Prudential's Asia-led expansion strategy has proved very successful and 80% of the company's profits now come from outside the U.K. It is currently focused on expanding into the U.S. market through its wholly-owned subsidiary Jackson National Life Insurance Company, which has $130 billion in assets and is a major provider of annuities. (The Prudential brand is not much use in America as a similarly-named but unconnected company, Prudential Financial Inc., already exists.) Overall, I rate Prudential's prospects highly, and while its yield is lower than that of U.K.-focused peers like Aviva and RSA Insurance, its growth prospects look much stronger.

Consumer goods giant Reckitt Benckiser produces household products like Cillit Bang, Calgon and Durex, which are used by millions of people daily. In fact, Reckitt's acquisition of SSL (owners of the Durex brand) in 2010 provided a clue to the company's future direction -- health and hygiene products, where it sees stronger opportunity for growth. Reckitt's record suggests it knows a lot about growth -- its share price has risen by 33% over the last five years, during which period its dividend has more than doubled. Although such growth is likely to slow, it's definitely one for the retirement portfolio.

My final top scorer -- one of a trio rating 21/25 -- is Compass Group. You would not necessarily expect a catering outsourcing company to become a 12 billion pound FTSE 100 giant, but Compass is the world's largest contract caterer and does far more than serve up dinners in a handful of staff canteens. I was impressed by Compass' dividend history and growth record, although I would hope for a dip in price before buying shares in Compass, as its current P/E of almost 18 places it above its historical average, depressing its yield to a below average 2.8%.

Smokers vs. supermarkets
My two tail-enders in this report still managed to score an impressive 20/25. Without getting involved in the ethical issues of tobacco, I think that Imperial Tobacco's biggest weakness is its relatively weak presence in emerging markets. Despite this, its final results, which were published this morning, show strong financial growth -- adjusted earnings per share were up by 8%, while the adjusted operating margin was maintained at a stunning 42% and the dividend was increased by 11%.

On the downside, I suspect most of this growth was the result of the company's 500 million pound share buyback program, as overall "stick volumes" declined by 2.7%, and revenue grew by just 1%, allowing for exchange rate losses. I am not confident that this progress can be sustained over the long term -- Imperial and its peer British American Tobacco pay out a high proportion of earnings as dividends, meaning that any shortfall in profits could curtail these companies' outstanding dividend growth record.

At the other end of the profit margin scale lies Sainsbury, whose five-year average operating margin is just 3.3%, substantially below the 5% average enjoyed by Tesco and Morrison. On the other hand, it outperformed these peers in the first half of 2012, delivering like-for-like sales growth of 1.7% against Tesco's 0.1% gain. Sainsbury also offers an attractive 4.6% dividend and would certainly be on my supermarket shortlist.

Learn from the best
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 had 20 billion pounds of private investors' funds under management at the end of 2011 -- more than any other City manager.

Woodford's track record is truly outstanding. His dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to Dec. 31, 2011 -- a record few investors can even dream of.

You can learn about all eight of Neil Woodford's top holdings and see 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.

Buffett buy signal! The billionaire investor has found an attractive large-cap right here in Britain! Discover what he bought and the price he paid in this special report -- "The One U.K. Share Warren Buffett Loves" -- it's free.

Further investment opportunities:

The article Are These the Five Best Retirement Shares in the FTSE? originally appeared on

Roland Head owns shares in Tesco and Aviva but does not own shares in any of the other companies mentioned in this article.  The Motley Fool owns shares in Tesco.

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