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.
BP (NYS: BP) might seem like a perfectly wrong stock to retire with, given the monster hit the company took from the Gulf oil spill in 2010. But as the company tries to put the spill behind it, BP continues to do what it does best: make money from the continuing high demand for oil and gas. Below, we'll look at how BP 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 BP.
What We Want to See
Pass or Fail?
Market cap > $10 billion
Revenue growth > 0% in at least four of five past years
Free cash flow growth > 0% in at least four of past five years
Beta < 0.9
Worst loss in past five years no greater than 20%
Normalized P/E < 18
Current yield > 2%
5-year dividend growth > 10%
Streak of dividend increases >= 10 years
Payout ratio < 75%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With only five points, BP gives conservative investors some of what they want but also raises many concerns. The huge hit to revenue and free cash flow that stemmed from the spill has had an impact on the company, and although BP has restored part of its dividend, investors are clearly still wary about the stock's future prospects.
Obviously, the Deepwater Horizon disaster and the resulting oil spill at the Macondo well have dominated the attention of the company and its investors. BP has been negotiating with the companies associated with the project, having successfully reached billion-dollar settlements with co-owners Anadarko Petroleum (NYS: APC) and Mitsui. But the big question remains whether subcontractors Halliburton (NYS: HAL) and Transocean (NYS: RIG) will have to pay up.
The uncertainty has helped to hold the stock's price down, along with general concerns about the global economy. The stock's malaise has prompted some to say that the company should follow the lead of ConocoPhillips (NYS: COP) and Marathon Oil (NYS: MRO) and break itself up into parts to unlock shareholder value. Although other major oil companies like Chevron (NYS: CVX) trade at single-digit P/Es and at a discount to their assets, BP's discount is particularly wide.
For retirees and other conservative investors, the company's restored dividend looks fairly attractive, even at half the level it enjoyed before the spill. The company has some growth potential if it can get itself out from under the impact of the Gulf disaster, but despite some progress, that may still be a long time coming.
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 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 Chevron. 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.
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