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) still hasn't entirely cleaned up its reputation following the huge oil spill in the Gulf of Mexico two years ago. But as a low-priced oil giant, BP is still attractive to investors who care more about making money looking forward rather than past track records of problems. Can BP put its past behind it and get back on track? Below, we'll revisit 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%
7 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at BP last year, the company has picked up two points, as growth has returned to the company. The shares haven't done much, though, rising less than 5% over the past year.
Two years on from the Deepwater Horizon incident, BP is still dealing with fallout from the spill. Back in early September, the Justice Department charged BP with gross negligence, subjecting the oil giant to potential fines of $21 billion. Although BP has done its best throughout to try to share the blame with Transocean (NYS: RIG) and Halliburton (NYS: HAL) , it hasn't had much luck getting its partners to pony up for any damages.
In response, BP has been selling assets to raise cash. Last month, it sold some of its Gulf oil and gas fields to Plains Exploration & Production (NYS: PXP) for $5.55 billion, and Royal Dutch Shell (NYS: RDS.A) also agreed to buy an interest in one of the Norwegian oilfields that BP included in its portfolio.
But the truly massive asset sale came earlier this week, as BP agreed to sell its 50% stake in a Russian joint venture to Russian oil giant Rosneft for $17.1 billion in cash plus a stake of nearly 13% in the company. BP will even get a couple of seats on the Rosneft board of directors. The cash could prompt further improvements in BP's dividend.
For retirees and other conservative investors, BP shares are still extremely inexpensive. That reflects continued uncertainty about potential liability for the Gulf spill, but with a healthy dividend, BP seems increasingly attractive as an investment -- as long as you can get past the company's track record on environmental impact.
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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The article Will BP Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton and Transocean. Motley Fool newsletter services recommend Halliburton. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.