Five shares to help you retire rich

If you take a long-term view, and could hold just five shares, which would they be? Our experts pick their favourites: buy, hold for at least five years, reinvest the dividends - and enjoy your retirement.

If you take a long-term view, and could hold just five shares, which should they be? We asked our experts to choose one each. Buy them, hold them for at least five years, reinvest the dividends, and it could help you retire rich

Retirement investment #1 HSBC

by Paul Hill

Although many of the world's markets are trading at, or near, their all-time highs, there's still big risks. Optimism has been fuelled by record merger and acquisition (M&A) activity, cheap debt, lower oil prices and increased appetite for risk. The VIX (volatility) index, Wall Street's "fear gauge", has fallen to 13-year lows. But these benign conditions could alter, so picking quality defensive stocks at cheap prices remains crucial to achieving long-term outperformance.

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Take HSBC (HSBA). It is one of the world's largest banks with a market capitalisation of £100bn, operating substantial businesses in Europe (29% of profits), Hong Kong (21%), Asia (13%) and America (37%). But as with most giants with fingers in every pie, occasionally it slips up, as it did in the second half of 2006. Then, at its December trading update, it revealed that revenue growth had slowed after being hit by rising bad debts in the US and the UK. HSBC pointed to high levels of consumer indebtedness in the UK, while in America, a change in bankruptcy law in October 2005 and a weaker housing market were blamed. Clearly this wasn't good news, but the market's stinging reaction to the higher bad debt levels has been overdone particularly as new loans to sub-prime borrowers have now been reined-in, thus decreasing the group's overall exposure to the debt-laden consumer. As an illustration of the punishment that HSBC's shares have endured, the stock has underperformed Royal Bank of Scotland, one of its main peers, by 15% over the past three months alone even though the latter arguably has a greater exposure to the troublesome UK and US markets.

HSBC's valuation looks compelling for the cautious and income-seeking investor. For 2006, HSBC is forecast to generate earnings per share of 77.7p, and to pay a generous 40.8p dividend, putting the shares on a miserly p/e ratio of 12 with a 4.3% yield. Analyst estimates predict that earnings per share will rise further to 82.8p and 90.8p respectively over the next two years, with the yield increasing to 5%. This makes the shares look like good value as they stand, but I also think these City estimates are too conservative.

HSBC is also expanding its Chinese interests it owns 19.9% stakes in Bank of Communications and Ping An Insurance. All in all, it looks like one to tuck away for the long term. There are risks further weakness in the sub-prime market, for example. But for this level of growth, diversity and quality of earnings, I believe HSBC's defensive characteristics will reward the patient investor and I rate it a buy at 941p.

Paul Hill runs Precision Guided Investments

Retirement investment #2 BHP Billiton

by Tim Price

In time-honoured Eurovision tradition, I'd like to list my favourite UK sectors and stocks in reverse order. Among my least favourites are mobile telecom, biotech and media stocks. Why? Because their short-term prospects just don't seem certain enough to make now a reasonable time to buy them. Next come utilities, the food producers and many general retailers. These sectors, while defensive, feel like they'll lag over the longer term under any market conditions except apocalypse.

So what are my contenders for the best buy out there? I'm bullish about tobacco. It may be a classic defensive sector, but there are also grounds for seeing growth opportunities in emerging markets as richer populations look towards premium brands. My favourite would be British American Tobacco (BATS): the stock has recently traded at new 52-week highs (a positive for most technical analysts) and the business sells over 300 brands in 180 territories worldwide. It also throws off tons of cash (see the story on the right for more on this). I'm also keen on oil for the long term. Despite concerns over global warming and the geopolitical battle for resources, Big Oil isn't going to slide into redundancy any time soon. I'm a believer in the Hubbert's peak' theory that oil production is essentially in decline: it is difficult to believe Opec when it comes to stated reserves, and alternative fuels seem unlikely candidates to step into the void. Both BP (BP), despite recent safety concerns, and Royal Dutch Shell (RDSB), despite problems over reserves, would be natural portfolio candidates.

My absolute favourite sector relates to the undeniable long-term dynamic of Asian growth. Goldman Sachs forecasts that within 20 years Asian markets will be worth as much by market capitalisation as the US is now. These young, fast-growing markets need fuel for growth. I have long been a believer in the commodities supercycle' for a number of reasons not least, I am wary of fiat currency in a superliquid world, and take comfort in the diversifying store of value that base and precious metals represent. There are a number of stocks that give diversified access to the minerals sector, but BHP Billiton (BLT) is my favourite. The stock gives exposure to coal, iron ore, gold, nickel and copper concentrate, not to mention petroleum exploration and production. As a one-stop shop currently trading on a forward price/earnings multiple of around eight times, with a secular commodities tailwind behind it, Billiton would be hard to beat as a long-term investment.

Tim Price is CIO of Global Strategies at Union Bancaire Prive, London

Retirement investment #3 British American Tobacco

by Charlie Gibson

Investing for the long-term requires a two-pronged approach. You need to combine a good strategic outlook with a measure of value. As far as the strategic outlook goes, my most important criterion is near-certainty that the firm in question will still be around in five years' time and won't be worth less than it is now: capital preservation is all. This eliminates a lot of highly cyclical firms from my list of candidates: I can't risk being exposed to firms that will be in trouble if the economy takes a turn for the worse.

I also require the Government (or governments in general) to have as little influence as possible in the firm's day-to-day affairs, either as a customer or as a regulator. I have no confidence in the ability of governments to make the fine judgements necessary to skilfully balance the interests of industry and the consumer. In general, they appear to prefer to lurch from extreme to extreme, grabbing as many headlines as they can on the way. Applying these criteria, the number of candidate sectors for long-term investment is just four.

Of these, I am inclined to rule out food producers. Conditions have been persistently tough in this industry over the past two decades. This leaves me with just three: food retailers, beverages and tobacco. This brings me to the second prong of my two-pronged approach: value. Whereas the valuations in the food retail and beverage industries generally appear to be up with events, those in tobacco seem to be lagging behind. The media may be partly to blame; tobacco stocks were flavour of the month' in the early years of the millennium, as everyone switched out of technology stocks, but in recent months there seems to have been a deafening silence surrounding the industry. The result is that tobacco's stockmarket performance has once again started to lag.

At the moment, my favourite stock in the sector is British American Tobacco (BATS). Despite everything that has been said and done about the tobacco industry in the last few years, BAT's volumes are still growing and it has seen compound earnings growth of 9.4% in underlying earnings since 2000 as it has skilfully juggled declining mature markets (Europe and North America) with growing new ones. Now the world's second-largest cigarette manufacturer, BAT is transforming itself from a multinational business operating in 180 markets worldwide into an integrated global enterprise. It has centralised specialist functions (for example, the pooling of strategic leaf stocks) and cut overhead costs. A further £144m (or approximately 5% of cash generated from operations) of cost cuts are expected by December 2007. In the meantime, BAT has successfully ring-fenced its potential legacy liabilities in the US within the RJ Reynolds Tobacco Company. This should protect its broader operations if the worst should happen in the American courts. Even so, I don't see this possibility as likely. Instead, I expect large headline-grabbing fines in the US courts to continue to be followed by significant reductions (or even reversals) on appeal.

BAT made 89.14p in underlying earnings in 2005 and is expected to make 94.13p in 2006, followed by 102.24p in 2007 of which about half will probably be paid out in dividends. Despite adverse currency movements in the fourth quarter, the 2006 forecast in particular looks conservative given that the company had already made 75p in earnings at the nine-month stage compared with 66.64p in the previous year. Even so, a p/e rating of 15.8 times hardly seems excessive for a company with both a history and a stated ambition of continuing to grow earnings at a "high single-figure" rate. My own dynamic value model for predicting stock returns suggests that BAT is a buy at this level and a sell at £18.37 (a 26% difference).

I'm sure that when we look back in five years' time, we will see that many companies will have performed better than BAT over the period, but to try to pick those out now is too risky for a retirement portfolio. When it comes to pensions, it's better to get rich slowly and know you are doing so than to get poor quickly. For the long term, I'd certainly be very happy to think my money was tied up in BAT.

Charlie Gibson is an analyst

Retirement investment #4 Shell

by James Ferguson

The kind of stocks one buys for a pension have to live up to quite a wish list. First, we want a proven growth track record, but great prospects too. We want a decent dividend income, so we look for a good payout ratio and high cash flows. And we want a dependable blue chip because this is our pension, so we don't want to take much risk. Next, we want that stock to be looking really bombed out. Time after time, studies show that the best performance comes from stocks that are cheap'. That means trading at discounts to their peers, on low p/es and low price-to-sales ratios. A high and growing dividend yield is also a must.

Amazingly, quite a few stocks do satisfy these criteria. Despite the continued bull market in most metals, several miners have fallen this year. The pharmaceutical majors are now trading on p/es of under 15 times, when at the end of the 1990s the market was happy to pay 35 times for them, and financials, from insurance firms to banks, offer great value too. HSBC (HSBA) now yields nearly 5%, more than gilts and most utilities too (see the story below for more on this). The fact is that the FTSE still offers great long-term value relative to other asset plays.

But the number-one sector to have been beaten down by bad news and the collapse in the price of its underlying product is the oil sector. While traders, arbitrageurs and corporate merger and acquisition deals combine to ensure that stocks within sectors rarely drift too far apart, BP (BP) and Shell (RDSB) have been ground down so far that even their multi-year relationship with Exxon Mobil (EXX) has broken down (see chart). So unless you think oil is a long-term sell (unlikely, given the supply/demand situation), this is the place to put your retirement nest-egg.

Even after BP's recent troubles, Shell is still the more downtrodden. Sure,

it will have to revise its forecasts down slightly due to the recent oil-price weakness, but the shares are at the same level today as they were in 1997, when oil was half the price it is today in sterling terms. Yet sales over that time are 125% higher: Shell is now valued at just 0.7 times its sales, a third of its 1998 level. Shell has quadrupled its dividend over the last 20 years, but the payout could go higher still. Over the last year, dividend payments have totalled 66.6p, but over the last four reported quarters, earnings per share has been 210p. Less than a third of profits have been paid out as dividends. The company has historically paid out about half of all profits as dividends, so not only should dividends continue to grow at the pace of profits, but they should grow another 50% or so on top of that. With a dividend yield that's already 3.9% (about where the 30-year gilt was two months ago), that's a really pretty exciting prospect. You can be sure of Shell.

James Ferguson is an economist and stockbroker with Pali International

Retirement investment #5 Murgitroyd

by Tom Bulford

When I was young, I was encouraged to get a professional qualification. Why? Because it meant a job for life. And that holds true today. So for a share for life or at least five years I'm going for the professional services sector. Traditionally, the professions organised themselves into partnerships, but these days you can tap into the security of earnings offered by dentistry, accountancy, architecture, and environmental consultancy, to name but a few. These have several attributes. First, pricing power who ever queries their tax accountant's or dentist's bill? Second, they are largely recession-proof. And third, as people businesses', they can ride through tough times by cutting bonuses or shedding staff.

My choice is Murgitroyd (MUR), which operates in the world of patents and trademarks. In fact, it is Scotland's leading practitioner, and represents several leading firms from north of the border and elsewhere. Thanks to the expansion of international trade, this is a growth business. There are more than four million patents in force globally, and within Murgitroyd's core market the number of new ones filed at the European Patent Office has grown at about 6% annually for the last five years. This is keeping it busy and stretching the capacity of the profession: the average age of UK patent attorneys is 57, and since any aspirant must first have a science, maths or engineering degree and six to seven years of training, retirees are not being replaced. This means Murgitroyd has a reliable business, and the chance to grow by taking over the clients of those leaving the industry.

Murgitroyd has also made acquisitions, to which it has introduced the type of management not usually associated with professional partnerships. Careful targeting of new business, an up-to-date IT system, a tough attitude to cash management and a group-wide fee structure have been implemented at the firms it has acquired since it joined Aim in 2001. It bought Nice-based Cabinet Bonneau, London-based Castles, and Murgitroyd's main Glasgow rival Fitzpatricks. My advice is to buy the shares and send your children off to the nearest college for patent attorneys.

Tom Bulford is the editor of Red Hot Penny Shares