Is Windstream 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 Windstream (NAS: WIN) 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 Windstream.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Size||Market cap > $10 billion||$6.4 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of five past years||4 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.86||Pass|
|Worst loss in past five years no greater than 20%||(22.7%)||Fail|
|Valuation||Normalized P/E < 18||16.26||Pass|
|Dividends||Current yield > 2%||8.0%||Pass|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||180.3%||Fail|
|Total score||4 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only four points, Windstream fails to connect conservative investors to many of the things they like to see from stocks. The company unquestionably pays a nice dividend yield, but that shouldn't lull retirement investors into a false sense of security.
Windstream is a telecom provider that has found a profitable niche market: rural areas. In their hurry to move toward more lucrative mobile and Internet services, industry giants AT&T (NYS: T) and Verizon (NYS: VZ) have largely moved away from their legacy landline businesses, jettisoning them to companies like Windstream-competitors Frontier Communications (NYS: FTR) and CenturyLink (NYS: CTL) .
Some analysts believe that these companies are dying businesses. But in the underserved areas they target, Windstream and its peers have a competitive advantage in offering higher-value services like broadband Internet. In that sense, Windstream could well end up turning the tables on AT&T and Verizon for their shortsightedness. Its recent pickup of PAETEC (NAS: PAET) could well push the company even further in that direction.
One concern that's especially important for retirees and other conservative shareholders is the company's high dividend payout ratio. Because the landline business produces a ton of cash flow while also depressing earnings due to depreciation, Windstream's cash picture is better than you'd think from looking at the payout ratio. Windstream may not be the safest play in telecom, but income-hungry investors will want to take a closer look at the company to see if it deserves a place in their retirement portfolios.
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 Windstream 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. Motley Fool newsletter services have recommended buying shares of AT&T. 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.