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.
Before cellphones, the Internet, or cable television, there was AT&T (NYSE: T ) . Ma Bell goes back to the early days of telephony, having survived the breakup of its landline monopoly, the contentious bankruptcy of its primary long-distance rival, and the emergence of wireless mobile devices. But does AT&T have what it takes to stay current in a fast-moving telecom world? Below, we'll revisit how AT&T 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 AT&T.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$178 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.59||Pass|
|Worst loss in past five years no greater than 20%||(28.1%)||Fail|
|Valuation||Normalized P/E < 18||29.69||Fail|
|Dividends||Current yield > 2%||5.9%||Pass|
|5-year dividend growth > 10%||5.1%||Fail|
|Streak of dividend increases >= 10 years||28 years||Pass|
|Payout ratio < 75%||257.9%||Fail|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at AT&T last year, the company has lost a couple points. A huge charge related to the breakup of its planned T-Mobile merger hit earnings, pushing its P/E and payout ratios way up.
AT&T is still reeling from getting rebuffed in its attempt to buy out T-Mobile. AT&T had to pay a $4.2 billion penalty for not getting the merger done, part of which will be composed of $1 billion in wireless spectrum to go to T-Mobile.
As a result, obtaining more wireless spectrum seems like a top priority for AT&T in order to keep increased demand from its 4G service from breaking its network. Verizon (NYSE: VZ ) was quick to pick up spectrum from a consortium of cable companies for $3.6 billion late last year. Some have speculated that AT&T could go to DISH Network (Nasdaq: DISH ) or MetroPCS (NYSE: PCS ) to try to buy spectrum -- although DISH has said that it would prefer to start its own wireless network and therefore wouldn't want to part with its rights.
But AT&T is far from dead. Sales of the iPhone are still strong. Moreover, its deal with Frontier Communications (Nasdaq: FTR ) to resell AT&T wireless services could be a growth driver for both companies, especially as Frontier has seen its share price plunge on concerns about the sustainability of its dividend.
For retirees and other conservative investors, AT&T's dividend remains the primary attraction. But Ma Bell isn't nearly as utility-like as it once was, so investors shouldn't expect the nearly risk-free ride they got for decades in the mid-20th century. AT&T has plenty of potential, but it will need to execute better in order to sustain its competitive edge.
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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