Is Barrick Gold 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 Barrick Gold (NYS: ABX) 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 Barrick Gold.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$49.6 billion||Pass|
|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||0.40||Pass|
|Worst loss in past five years no greater than 20%||(11.5%)||Pass|
|Valuation||Normalized P/E < 18||14.26||Pass|
|Dividends||Current yield > 2%||1%||Fail|
|5-year dividend growth > 10%||16.9%||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||12.5%||Pass|
|Total score||7 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With seven points, Barrick Gold gives conservative investors much of what they prefer to see in stocks. Given how gold has been nearly the only bright spot in a lousy market environment, it's no big surprise that miners like Barrick have held up relatively well.
Gold has seen big gains, propelled by a lack of confidence in what governments are doing to try to address economic problems. Yet unlike earlier this year, when silver bullion ETF iShares Silver Trust (NYS: SLV) and silver-streamer Silver Wheaton (NYS: SLW) rose even faster than gold, this price advance has been limited mostly to the yellow metal.
Moreover, one frustration for investors is that gold mining companies don't always rise with bullion. The $100 rise in bullion prices this month has pushed SPDR Gold (NYS: GLD) higher, but stocks like Newmont Mining (NYS: NEM) and Goldcorp (NYS: GG) are essentially flat for August -- and Barrick is actually down slightly.
One challenge for Barrick has been rising operating and capital costs. Barrick now sees having to spend as much as $5 billion on its Pascua Lama gold mine, up from a $2.8 billion estimate two years ago. Yet with the company's net income and cash margins jumping due to the big price increase for gold, the challenge of higher costs has thus far not hurt its prospects.
Retirees and other conservative investors may not feel comfortable with gold stocks, but as we've seen recently, sometimes they're the place to be. Barrick is a reasonable way to get some exposure to gold without taking as much risk as a less well-established miner would entail.
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 this article was published Fool contributorDan Caplingerowns shares of iShares Silver Trust. You can follow him on Twitterhere. 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 adisclosure policy.
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