Will Chesapeake Energy 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.

Few stocks are more controversial these days than Chesapeake Energy (NYSE: CHK  ) . On one hand, the company presides as a leader in the natural gas industry, which has been one of the most exciting places to invest in the past several years. But amid falling gas prices, what has set Chesapeake apart from its peers is an unfortunate tendency for CEO Aubrey McClendon to get involved in some questionable practices. Can the company finally extract itself from its predicament and get down to business again? Below, we'll revisit how Chesapeake Energy 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 Chesapeake Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $12 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 1 year Fail
Stock stability Beta < 0.9 1.26 Fail
  Worst loss in past five years no greater than 20% (58.4%) Fail
Valuation Normalized P/E < 18 7.71 Pass
Dividends Current yield > 2% 1.9% Fail
  5-year dividend growth > 10% 7.8% Fail
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 20.6% Pass
       
  Total score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Chesapeake Energy last year, the company has actually seen its score go up by a point. But with shares having fallen by about a third in the past year, shareholders aren't necessarily all that happy about its more reasonable valuation.

Obviously, much of Chesapeake's bad performance has to do with falling natural gas prices. As shale gas plays have increased production by leaps and bounds, the glut of gas has especially hurt Chesapeake. Whereas rival Devon Energy (NYSE: DVN  ) has substantial and increasing exposure to oil and liquids, Chesapeake has been stuck with a gas-rich portfolio that hamstrings its ability to benefit from higher prices for other energy products, especially given that its costs are significantly higher than low-cost leader Ultra Petroleum (NYSE: UPL  ) and Southwestern Energy (NYSE: SWN  ) .

Management, though, has been the lightning rod for controversy. With recent revelations that its CEO was involved in a hedge fund that arguably was in conflict with the company's interests, Chesapeake is only adding to a long history of provocative behavior from its management. Now, the company's under investigation for possible land-price collusion with Encana (NYSE: ECA  ) .

But shareholders have activist investor Carl Icahn on their side, and already, he's having an impact. If Icahn can succeed in getting the company turned around or even bought out, then it could be a winning move for new investors.

For retirees and other conservative investors, the big question is whether Chesapeake's fundamental value prospects outweigh the drag that McClendon has put on the stock. Reasonable investors could have differing opinions on that question, but unless you're willing to take extensive management-related risk, you shouldn't put a dime into Chesapeake stock right now.

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 Chesapeake Energy 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 Devon Energy, Chesapeake Energy, and Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Ultra Petroleum, and Devon Energy. 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.


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