Is Cliffs Natural Resources the Right Stock to Retire With?
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. Let's figure out what makes a great retirement-oriented stock, then examine whether Cliffs Natural Resources (NYS: CLF) has what we're looking for.
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 Cliffs Natural Resources.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Size | Market cap > $10 billion | $12.1 billion | Pass |
Consistency | Revenue growth > 0% in at least four of five past years | 5 years | Pass |
Free cash flow growth > 0% in at least four of past five years | 5 years | Pass | |
Stock stability | Beta < 0.9 | 2.36 | Fail |
Worst loss in past five years no greater than 20% | (48.8%) | Fail | |
Valuation | Normalized P/E < 18 | 9.13 | Pass |
Dividends | Current yield > 2% | 1.4% | Fail |
5-year dividend growth > 10% | 21.4% | Pass | |
Streak of dividend increases >= 10 years | 2 years | Fail | |
Payout ratio < 75% | 5.0% | Pass | |
Total score | 6 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, Cliffs Natural Resources has a lot of what conservative investors want from a stock. The metal producer has seen plenty of growth in recent years, but that's left it exposed to the potential for a slowdown in the global economy.
Cliffs mines iron ore and metallurgical coal with properties primarily in North America and Australia. Growth in China has been good to iron ore producers. Even with Vale (NYS: VALE) and BHP Billiton (NYS: BHP) dominating the space, there's plenty of room for smaller players like Cliffs to boost production and benefit from strong demand.
Cliffs has moved aggressively to take advantage of those conditions. Earlier this year, it paid $5 billion to acquire iron ore miner Consolidated Thompson and its vast reserves in eastern Canada. Given that Vale, BHP, and Rio Tinto (NYS: RIO) are all trying to expand, the move is a welcome one.
But not everything has gone right for Cliffs. Its coal segment is inefficient, with high costs putting the company at a competitive disadvantage to Alpha Natural Resources (NYS: ANR) and Patriot Coal (NYS: PCX) . Given the importance of coal to emerging-market growth, it would be best if Cliffs can cut costs and get more competitive in the coal area.
Retirees and other conservative investors have to be aware that Cliffs relies on global growth for its success. In particular, a Chinese slowdown could cause a sharp reversal in the rich rewards shareholders have enjoyed for more than a decade. If you're willing to take that risk, however, Cliffs may have more upside.
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.
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At the time thisarticle was published
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