Is BP the ultimate retirement share?

BPThe 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 UK 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 UK large-caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund.

Today, I'm going to take a look at BP , 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:

Total Return 2007 2008 2009 2010 2011 Trailing 10 yr avg.

BP 12.1% -9.8% 21.0% -21.0% 2.7% 3.0%
FTSE 100 7.4% -28.3% 27.3% 12.6% -2.2% 6.9%

(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:

Item Value 5 year average financials

Year founded 1908
Market cap £81bn
Net debt £19.4bn
Dividend Yield 4.2%
Operating margin 6.3%
Interest cover 21.1x
EPS growth 2.0%
Dividend growth 3.3%
Dividend cover 2.2x

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. 5/5
Performance vs. FTSE Has the potential but hasn't delivered in recent years. 3/5
Financial strength Remains strong financially despite its problems. 3/5
EPS growth BP is still in transition and isn't delivering consistent growth. 2/5
Dividend growth Erratic growth but a solid yield and appropriate level of cover. 3/5

Total: 16/25

A score of 16/25 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.

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