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.
Over the past decade, investors have become well-acquainted with some of the biggest companies from the emerging markets. One such company is Brazilian energy giant Petroleo Brasileiro (NYSE: PBR ) , which has gone from being almost unheard of to becoming one of the most important oil and gas companies in the world. With huge discoveries off the coast of Brazil, Petrobras is in the challenging position of figuring out how to make the most of them. Will the company succeed in turning Brazil into an energy superpower? Below, we'll revisit how Petrobras 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 Petrobras.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$133 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||0.79||Pass|
|Worst loss in past five years no greater than 20%||(58.5%)||Fail|
|Valuation||Normalized P/E < 18||9.95||Pass|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||(8.9%)||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||35.3%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Petrobras last year, the company has kept its six-point score. But the company's stock has dropped about 40% in the past year, as Brazil's growth has slowed and in light of recent weakness in oil prices.
Petrobras has come into the limelight in the energy industry because of some recent finds in the past few years that have been truly massive. The discovery of the Tupi oil field off its coast was the largest oil find in the Western Hemisphere in three decades, and other areas in the pre-salt basin off its coast have led to even more reserves.
The finds are so enormous, in fact, that Petrobras isn't even trying to develop them by itself. The company has hired deepwater driller SeaDrill (NYSE: SDRL ) and obtained rig technology from National Oilwell Varco (NYSE: NOV ) to help it with its offshore fields. Moreover, Chevron (NYSE: CVX ) and Statoil (NYSE: STO ) have stakes in some of the fields that Petrobras operates and therefore have been helping the Brazilian giant with production. Recent problems with leaking oil in the area have gotten Chevron into some trouble, but Petrobras has also had some spills of its own.
Even with all these riches, though, Petrobras has encountered other difficulties, including missed production targets and losses in its refining segment. That, combined with overall concerns about Brazil's prospects for growth going forward, has turned some investors off to the stock.
For retirees and other conservative investors, the drop in Petrobras' dividend yield even in light of lower share prices is cause for concern. As oil prices have dropped sharply in recent weeks, some believe that energy stocks could be vulnerable to another severe decline. In the long run, though, the big reserves that Petrobras has should help it weather any storms in the energy markets and come out ahead in the end.
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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