Are These The Five Best Retirement Shares In The FTSE?

The Motley Fool

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 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 (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, Intertek Group (LSE: ITRK), IMI (LSE: IMI), Whitbread (LSE: WTB), Aberdeen Asset Management (LSE: ADN) and Bunzl (LSE: BNZL).

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

Criteria

IMI

Intertek Group

Bunzl

Aberdeen Asset Management

Whitbread

Longevity

5/5

3/5

4/5

2/5

5/5

Performance vs. FTSE

5/5

5/5

4/5

5/5

5/5

Financial strength

3/5

4/5

4/5

5/5

4/5

EPS growth

4/5

5/5

4/5

5/5

4/5

Dividend growth

4/5

4/5

5/5

5/5

4/5

Total

21/25

21/25

21/25

22/25

22/25

IMI

British engineering company IMI, which specialises in fluid control, has delivered an average total return of 20% per year over the last decade. Forecasts suggest further strong earnings growth this year, giving a forward price to earnings ratio (P/E) of 14.4 and a forecast dividend yield of 2.8%. Although these are only forecasts, it's worth noting that IMI has not cut its dividend in more than twenty years -- a sterling record that is a real asset for a retirement share and gives me confidence that this year's expected 8% increase is realistic.

Intertek Group

Industrial testing and certification specialist Intertek Group has delivering total returns 2.7 times those of the FTSE 100 over the last ten years. As a retirement share, it offers a number of advantages, including strong dividend growth, attractive profit margins and good cash generation. The only problem is that the markets have already got wise to these attractions, and Intertek's shares currently trade on a rather lofty P/E of 29 times last year's adjusted earnings. Although strong earnings growth is expected this year, for me, Intertek's 1.5% forecast dividend yield for 2013 is simply not enough to warrant inclusion in a retirement portfolio.

Bunzl

Bunzl is the kind of company I would really like to own. Its business, supplying goods such as cleaning and packaging supplies to other businesses, is cash generative, growing and should benefit from the increasing economies of scale that its continuing expansion can provide. What's more, it has already been in business for 150 years and has increased its dividend every year for at least the last twenty. All of this means that although Bunzl's current 2.4% forecast dividend yield is below average, this company has gone onto my personal watch list for further investigation.

Aberdeen Asset Management

As an asset manager, rather than a bank, Aberdeen Asset Management offers a less risky way to invest in the financial sector, since much of its income is derived from fees, rather than investment returns. Founded in 1983, Aberdeen's growth has been impressive, although its youth was one of the few weaknesses I could find in its appeal as a retirement share. Aberdeen currently offers a forecast dividend yield of 3.4%, which is slightly above the FTSE 100 average of 3.2% and should be amply covered by free cash flow -- definitely worth a closer look.

Whitbread

Whitbread's 2001 exit from the pub and brewery business appears to have been well timed, and its main brands, Costa Coffee, Premier Inn and Brewers Fayre, have all performed strongly, fuelling rapid growth for the firm. In its most recent trading update, Whitbread reported another quarter of double-digit sales increases, fuelled by both like-for-like growth, and new outlets. From a retirement income perspective, my main concern is that Whitbread's high-paced growth and its £640m pension deficit could place the firm's dividend under pressure over the next few years, especially if sales growth slows.

The best FTSE 100 dividends?

I believe that three of the five companies I've discussed above are potential retirement shares, but several have below-average dividend yields, and there may be more attractive, high-yielding alternatives elsewhere in the FTSE 100.

Indeed, I can tell you that none of the five shares above were chosen by The Motley Fool's team of analysts for their latest special report, "5 Shares To Retire On". The Fool's in-house experts have crunched the numbers on every company in the FTSE 100 and identified five of the best blue chip dividend shares in the UK. I believe that this should be essential reading for anyone aiming to build a diversified, income portfolio for their retirement.

If you would like to know more, click here now to download your copy of this report -- it's free, but availability is strictly limited, so don't delay.