Will Petrobras Help You Retire Rich?

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.

Factor

What We Want to See

Actual

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.

Keep searching
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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Petrobras to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of SeaDrill and National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of all of the stocks mentioned. 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 a disclosure policy.


Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2012, at 11:43 AM, gcmagone wrote:

    Brazil has oil and problems. If they treat other companies the way they are treating Chevron, the best advice would be stay away.

  • Report this Comment On May 23, 2012, at 2:51 AM, PeakOilBill wrote:

    Don't forget what just happened in Argentina. I doubt it will happen in Brazil, but you never know down there. You might be waiting a long time for a big payoff. Things can change a lot, the longer out you look. If I wanted to take some risk, I would look at something risky that pays a nice dividend right now. Maybe something like Southern Copper and pray their mines don't get seized and that they can keep the strikes under control with huge bonuses every couple of years. As long as China keeps growing, they probably can.

    Of course, if the euro goes away, and takes the global economy with it, you will take an enormous loss.

  • Report this Comment On May 23, 2012, at 12:05 PM, artmuseum wrote:

    Rather safer to play Brazil via SDRL

    which has a Brazilian subsidiary -

    soon to be listed on local stock exchange

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