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 the companies I've covered so far on this page).
Today, I'm going to take a look at Randgold Resources (LSE: RRS) (NASDAQ: GOLD.US), the FTSE's largest gold miner and one of the few major gold producers that has managed to outperform the price of gold over the last five years.
Randgold Resources vs. FTSE 100
Let's start with a look at how Randgold Resources has performed against the FTSE 100 over the last 10 years:
|Total Returns||2008||2009||2010||2011||2012||10 yr trailing 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.)
Randgold Resources' share price has risen by 812% over the last ten years, and the company has paid dividends on top of this. As a result this miner's ten-year average trailing total return is more than twice that of the FTSE 100, providing an outstanding gain for early investors. Despite this, it isn't necessarily a great retirement share -- the combination of high ongoing risks and a lofty valuation make it riskier than average. Let's take a closer look at the fundamentals.
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 Randgold shapes up:
|Net debt (cash)||$450m|
|5 year average financials|
Here's how I've scored Randgold Resources on each of these criteria:
|Longevity||17 years is not a long time.||3/5|
|Performance vs. FTSE||Outstanding success has translated into share price performance.||5/5|
|Financial strength||$450m of cash and high profit margins are attractive.||5/5|
|EPS growth||Last year was exceptional, but the trend has been upwards.||5/5|
|Dividend growth||Strong growth but very low payout ratio.||3/5|
I think Randgold Resources is an impressive company -- its track record of repeated exploration, mine development and commercial success is pretty rare in the resources industry. In 17 years, it has discovered and developed five multi-million ounce gold mines and this year should see first gold from Randgold's biggest mine yet, the 20Moz Kibali mine in the Democratic Republic of Congo (DRC). Randgold's success is all the more impressive when you remember that it only operates in Africa -- a difficult geo-political environment that is fraught with financial and operational risks that have been the downfall of many western mining firms.
Randgold's difference seems to be its ability to successfully manage its relationship with communities and governments in the countries in which it operates -- and to effectively resolve the inevitable difficulties that arise, as in the case of a recent fire at its Tongon mine, and a $75m tax claim in Mali that Randgold describes as "wholly without merit" and is currently contesting. To be fair, Randgold has also had a measure of luck in this regard. For example, it has avoided being affected by the conflict in northern Mali because its mines are located in the southern part of the country. Had the country's geology been different, Randgold might have been unable to operate these mines for the last ten months, since the rebel attacks first started.
Although Randgold Resources score of 21/25 is well-deserved, I think that its emphasis on growth and its consequent high price-to-earnings ratio makes it unsuitable for adding to a retirement portfolio. Lots of future growth is priced into Randgold's share price and while this will probably be delivered, I think it leaves insufficient upside and income potential for a retirement investor. There's also the risk of a sharp fall in the price of gold, which could crush the company's profit margins.
Randgold's paltry 0.5% yield means that to take an income from the shares, you would have to hope for strong capital growth with the intention of selling some of your shares periodically. This is a high-risk and uncertain strategy, in comparison to the reliable dividend income provided by traditional blue chip shares such as GlaxoSmithKline, or even resource giants like Rio Tinto.
Top income picks
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 High Income fund grew by 342% in the 15 years to 31 October 2012, during which time the FTSE All-Share index managed a gain of only 125%.
You can learn about Neil Woodford's top holdings and how he generates such fantastic returns in this free Motley Fool report. Many of Mr 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.