This article is part of Morningstar's Guide to Retirement Saving. All this week we are arming you with the tools you need to secure the best possible retirement income.
Pension portfolios lend themselves to a value bias – the long-term nature of retirement investment means you have time on your side and can wait out a reversion to a stock’s fair value estimate. These three companies are currently rated four or five stars by Morningstar equity analysts, meaning they are trading at less than their fair value estimate. We reveal the equity analysts thoughts below.
BHP Billiton (BLT)
BHP Billiton owns a very substantial proportion of the planet's long-life, low-cost, export-oriented, expandable mining assets. Many of these are effectively irreplaceable, with low sovereign risk and proximity to key Asian markets. The assets can grow to meet the world's long-term increase in demand for natural resources. With the exception of iron ore, BHP lacks pricing power in its products; its narrow moat rating is founded on low-cost supply.
We give BHP Billiton a medium fair value uncertainty rating, as individual commodity price volatility is offset by mineral diversification and a robust balance sheet. This does not imply a lack of risk, however. BHP Billiton faces all the environmental and operational risks associated with mining as well as the country-specific risks associated with some of its assets.
Kingfisher (KGF)
There is a lot for medium-term investors to like about Kingfisher. A decade ago, the company was a multi-category retailer, an ineffective conglomerate of primarily no-moat businesses. Today, it is focused solely on home improvement, and we believe management is building upon some competitive advantages that are likely to sustain the company's excess returns on capital through the major secular challenges that traditional retailers currently face.
We believe the strategy to sell common products across its banners will allow Kingfisher to finally exploit its scale and help strengthen its economic moat as one of the cost leaders of the industry in Europe. Products will have instructions in several languages and will meet cross-border safety standards in order to be sold in multiple geographies.
Lloyds (LLOY)
Lloyds nearly destroyed itself in 2008 with its ill-considered acquisition of HBOS, and the U.K. government ended up with 43.5% of the combined group. Now, after years of bailouts and setbacks, the bank has come a long way in righting itself, and the government has begun selling down its stake. We're encouraged that the U.K. recovery is gaining speed, and we expect to see double-digit return on equity in 2015, along with a 2016 forward dividend yield of at least 4%, as a result. Lloyds has closed HBOS’ worst businesses, wrote down much of its bad assets, and is close to re-emerging as the powerhouse U.K. bank that it once was.
Lloyds' business is concentrated in the U.K. and the company is therefore exposed to the economic winds that sweep through the country--for better and for worse. Currently, we see the U.K.'s economy gradually strengthening. While losses have stabilized, they could spike if the U.K.'s recovery is interrupted.
