Are These the Ultimate Retirement Shares? – Aberdeen Asset Management plc (ADN), Eurasian Natural Resources Corporation (ENRC), United Utilities Group PLC (UU)

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.

United Utilities Group PlcIn 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 United Utilities Group PLC (LON:UU), Eurasian Natural Resources Corporation (LON:ENRC), Intertek Group plc (LON:ITRK), InterContinental Hotels Group PLC (LON:IHG) and Aberdeen Asset Management plc (LON:ADN).

Let’s take a look at how each of them scored against my five key retirement share criteria:

Criteria Eurasian Natural
United Utilities InterContinental
Hotels Group
Intertek Group Aberdeen Asset
Longevity 2/5 2/5 3/5 3/5 2/5
Performance vs. FTSE 2/5 3/5 5/5 5/5 5/5
Financial strength 3/5 3/5 4/5 4/5 5/5
EPS growth 3/5 3/5 4/5 5/5 5/5
Dividend growth 1/5 3/5 4/5 4/5 5/5
Total 11/25 14/25 20/25 21/25 22/25

Eurasian Natural Resources
A history of dodgy corporate governance, problematic debt levels, and a looming dividend cut all take the shine off miner ENRC’s recently improved production figures. To be fair, ENRC does have some decent assets, but its debt-fueled expansion drive has left it looking short of cash and vulnerable to an opportunistic takeover.

The company is expected to cut its dividend by 50% this year, leaving ENRC shares with a likely forward yield of just 1.8%, well below the solid 3% or more offered by mega-cap miners BHP Billiton and Rio Tinto. The investment case for ENRC is far more speculative and while investors may end up with a good result, this company simply isn’t suitable for an income-focused, low-maintenance retirement portfolio.

United Utilities
It may be surprising to see a high-yielding utility stock score so badly in this review, but at present, I don’t think United Utilities is a very good example of this type of company. It has lagged the FTSE 100 over the last 10 years, during which it has carried out a confusing mixture of acquisitions and divestments and been forced to raise 1 billion pounds from shareholders in a rights issue.

United’s identity as a regional water and sewage company is now more clearly defined, but like its water peer Severn Trent, United currently trades on a forward price-to-earnings ratio (P/E) of 17, making it look quite expensive. For retirement investors, I believe electricity utilities currently offer much better value — National Grid currently has a forward P/E of just 13.4 and offers a forecast dividend yield of 5.7%, considerably higher than the prospective 4.8% on offer from United.

InterContinental Hotels Group
InterContinental Hotels’ brand-focused business model means that it owns very few hotels, preferring instead to license its brands to third-party hotel operators. The strength of InterContinental’s’ brand portfolio, which includes Holiday Inn, means that it is able to negotiate favorable deals with hotel operators and enjoy healthy profit margins. In 2011 and 2012, InterContinental reported operating margins in excess of 33%, with much of this profit converted directly into free cash flow, helping fund strong dividend growth without reducing dividend cover.