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.
Around the world, telecom companies are huge dividend producers and have also seen impressive growth from the rise of the wireless revolution. Vodafone is an interesting play both for its European business as well as its exposure to the U.S. wireless market. Below, we'll revisit how Vodafone 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 Vodafone.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes. *Based on normalized earnings.
Since we looked at Vodafone last year, the company lost a point, as its payout ratio climbed above the 75% mark. The stock has also struggled, losing about 5% over the past year.
Even with its tepid stock performance, Vodafone's worldwide business has helped it weather the storm in its industry better than some of its European counterparts. In particular, France Telecom and Telefonica have both had to make dramatic moves to slash their dividends in the wake of poor economic conditions in Europe. Both Telefonica and France Telecom also have substantial operations outside their home markets, yet for Vodafone, its 45% stake in the Verizon Wireless joint venture has produced immense dividends that have helped it avoid the full brunt of the crisis.
One interesting idea that has come up, though, would involve Vodafone potentially giving up its stake in Verizon Wireless. For majority-owner Verizon Communications to buy out Vodafone, it would need to come up with $50 billion to $60 billion in financing to offer both cash and stock in a buyout. For its part, Vodafone is in no hurry to do a deal given the huge portion of the company's overall value that the Verizon Wireless stake represents, but CEO Vittorio Colao said he might be receptive to changes in the deal.
For retirees and other conservative investors, Vodafone represents a reasonable value in a depressed market. With better growth prospects ahead and a solid dividend, retirement investors should feel comfortable looking at Vodafone for telecom exposure in their 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.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report, "3 Stocks That Will Help You Retire Rich," names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
Add Vodafone to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
The article Will Vodafone Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends France Telecom and Vodafone. The Motley Fool owns shares of France Telecom. 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 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.