Is SeaDrill the Right Stock to Retire With?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Ever since the Gulf oil disaster, offshore drilling has had a stigma attached to it. But in many parts of the world, you'll find some of the biggest reserves in hard-to-reach places below ocean floors. SeaDrill (NYS: SDRL) hopes to take advantage of those opportunities. Below, we'll look at how SeaDrill does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at SeaDrill.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$15.9 billionPass
ConsistencyRevenue growth > 0% in at least four of past five years5 yearsPass
Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.91.34Fail
Worst loss in past five years no greater than 20%(65.3%)Fail
ValuationNormalized P/E < 1816.76Pass
DividendsCurrent yield > 2%9.0%Pass
5-year dividend growth > 10%NMNM
Streak of dividend increases >= 10 years2 yearsFail
Payout ratio < 75%73.9%Pass
Total score5 out of 9

Source: S&P Capital IQ. NM = not meaningful; SeaDrill just started paying a dividend in June 2010. Total score = number of passes.

With five points, SeaDrill gives conservative investors some but not all of what they'd like a stock to have. The company's stock has taken shareholders on a big roller-coaster ride in recent years, and consistent free cash flow burn shows the risks involved in the industry.

Even with oil prices having retreated from their recent highs, activity in the deepwater drilling space has never been stronger. Although SeaDrill started the trend, traditional oil servicer Transocean (NYS: RIG) has worked hard to get into the game. Moreover, competition has also come from an unlikely source: DryShips (NAS: DRYS) , which spun off its Ocean Rig (NAS: ORIG) ultra-deepwater drill-ship business just last month.

SeaDrill has an impressive list of customers, including Statoil (NYS: STO) , Petroleo Brasileiro (NYS: PBR) , and Total (NYS: TOT) . With operations in many locations throughout the world, SeaDrill isn't exposed to the same geographical risks that devastated Gulf-centered drillers after the spill and subsequent drilling moratorium.

For retirees and other conservative investors, SeaDrill's volatility takes a little getting used to. But with a 9% dividend, you'll find it easier to ride out the ups and downs of the stock. For someone with the right risk profile, SeaDrill would make a good addition to a retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add SeaDrill to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the13 Steps to Investing Foolishly.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Transocean. Motley Fool newsletter services have recommended buying shares of Total, Statoil, and Petroleo Brasileiro. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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