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.
Investors love to turn to telecom companies for lucrative dividends and solid financials, and Frontier Communications certainly doesn't skimp on its payouts. But in an industry that has changed dramatically toward high growth via wireless networks, Frontier's rural landline business seems outdated and doomed to decline. Can Frontier make the most of its aging assets while building into higher-growth areas? Below, we'll revisit how Frontier Communications 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 Frontier Communications.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Frontier Communications last year, the company has maintained its three-point score. Shareholders haven't been too pleased with their results, either, as the share price has been roughly flat over the past year.
Frontier attracts investor attention primarily because of its huge dividend. For years, the company has sported yields approaching and in some cases exceeding 10%, using cash flow from the assets it acquired from Verizon to finance payouts. Yet over the years, that dividend has shrunk, with the share price also falling to accommodate the payout and keep the yield deceptively stable.
The challenge that Frontier faces is how to go beyond traditional rural telecom services to build profits. Competitors CenturyLink and Windstream have both made acquisitions to try to get into various niches of cloud computing, including data storage and enterprise services. Yet with Frontier's huge debt, the company doesn't have much latitude to make any acquisitions of its own to broaden its scope.
In its most recent quarter, Frontier's struggles largely continued. Revenue continued to drop sequentially, with continuing falls in residential customer counts and free cash flow. With the company hoping to count on promotions to woo customers, Frontier may struggle to maintain the bottom-line rise it eked out during the third quarter.
For retirees and other conservative investors, Frontier's recent stability may create temptation that the stock has finally hit bottom. Yet despite the attractive payout, Frontier still needs to demonstrate a convincing path to growth and survival. Until it does so, Frontier is too speculative to be a prudent part of a retirement portfolio.
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.
Learn more about whether Frontier Communications can keep paying its current dividend in our in-depth research report on the rural telecom. Inside, we walk you through all of the key opportunities and threats facing the company. Better yet, you'll receive a full year of updates to boot. Click here to learn more.
Add Frontier Communications to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
The article Will Frontier Communications Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.