Is Suncor Energy 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.

The world needs energy now more than ever, and the quest for energy has led companies to previously unforeseen lengths to get it. Among them is Suncor Energy (NYS: SU) , which is a big player in the Albertan oil sands region in western Canada. With oil prices remaining high, can Suncor keep on generating the profits it has in the past -- or are its best days numbered? Below, we'll look at how Suncor Energy 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 Suncor Energy.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$54.4 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years2 yearsFail
Stock stabilityBeta < 0.91.67Fail
 Worst loss in past five years no greater than 20%(64.6%)Fail
ValuationNormalized P/E < 1812.08Pass
DividendsCurrent yield > 2%1.3%Fail
 5-year dividend growth > 10%24.6%Pass
 Streak of dividend increases >= 10 years9 yearsFail
 Payout ratio < 75%16.5%Pass
    
 Total score 5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With only five points, Suncor Energy misses the target on many of the things conservative investors like to see in a stock. Although the company is building a track record of increasing dividends, the extreme volatility in its stock in recent years gives shareholders a bumpy ride.

Not so long ago, oil prices weren't high enough for us to envision big growth potential from unconventional sources like oil sands. But with high oil prices expected to persist for the next several years at least, oil sands development has skyrocketed, with Suncor focusing on the Athabasca oil sands while Penn West Petroleum (NYS: PWE) covers the nearby Peace River sands. The move has also brought other players into the fold, such as Imperial Oil (ASE: IMO) , which is developing technology alongside ExxonMobil to reuse water from the oil sands production process -- a critical component of efficient operations there.

One problem Suncor faces, though, is getting its products to market. The recent rejection of TransCanada's (NYS: TRP) Keystone XL pipeline doesn't just hurt its own prospects; it also makes it harder for Suncor and the other companies involved in Canada's oil sands to transport energy products from remote locations to where they're needed. The company will need to rely on its long-standing relationships with railroads including Canadian Pacific (NYS: CP) , on whose board of directors veteran CEO Rick George sits.

Also, Suncor is seeing change at the top. Mr. George, who's held the top spot at Suncor for 21 years, is leaving in May. Although COO Steve Williams has already been tapped to replace him, it nevertheless means dealing with change at a critical time for the company.

For retirees and other conservative investors, nine years of rising dividends is a good start, although the yield is mediocre at best -- especially among energy stocks. What's more troubling, though, is the feast-or-famine performance of the stock in recent years. If you can stand high volatility, then Suncor has promise -- but it doesn't make the right pick for more nervous investors.

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.

Suncor is facing some big challenges right now, but we've got three stocks we think will do much better for you. Read about stocks that are thriving from $100 oil in the Motley Fool's latest free special report -- it's yours free by clicking here, but only for a limited time.

Add Suncor Energy 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 the "13 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. Motley Fool newsletter services have recommended buying shares of TransCanada. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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