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.
As a major coal producer, CONSOL Energy (NYSE: CNX ) benefited greatly from the huge expansion in emerging-market economies over the past decade. By providing exports to meet China's and India's huge hunger for coal, CONSOL was able to put up impressive growth. But as emerging markets have slowed down and the prices of alternatives like natural gas have fallen, many industrial customers have lost interest in coal. Can CONSOL survive the current shakeout? Below, we'll take a look at how CONSOL 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 CONSOL Energy.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$6.6 billion||Fail|
|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||1.46||Fail|
|Worst loss in past five years no greater than 20%||(59.7%)||Fail|
|Valuation||Normalized P/E < 18||14.39||Pass|
|Dividends||Current yield > 2%||1.7%||Fail|
|5-year dividend growth > 10%||11.1%||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||17.6%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With just four points, CONSOL doesn't have everything that conservative investors like to see in a stock. Certainly, the stock's price action is scary, with the shares having lost a third of their value in the past year.
CONSOL and its peers are suffering from two separate trends. Emerging-market demand has fallen because of slowdowns in emerging-market economies, hurting exports. In addition, utility companies, which are traditionally massive users of coal, have shifted much of their production to natural gas in response to low gas prices. Already, Southern Company (NYSE: SO ) expects to use more natural gas than coal this year for the first time in its history, while Duke Energy (NYSE: DUK ) is shutting down coal-fired power generation plants in favor of new gas-burning plants.
Interestingly, though, the place where demand has picked up is the one place you'd least expect it: Europe. Despite economic pressures on the Continent, exports of coal to Europe nearly doubled in 2011 from the previous year. With CONSOL's wholly owned export facility in Baltimore, the company has a competitive advantage over rivals Peabody Energy (NYSE: BTU ) and Arch Coal (NYSE: ACI ) , which have to share stakes in a coal export terminal in Virginia.
Still, conditions are tough. Just this week, CONSOL said that it would have to shut down its Buchanan coal mine in Virginia temporarily. The move is only expected to last a month or two, but until market conditions improve, closures like this will probably become commonplace across the industry, with CONSOL enduring its fair share of the suffering.
For retirees and other conservative investors, the price is right for coal stocks, which continue to languish in light of weak macroeconomic news. But it takes a risk level that doesn't fit in many retirement portfolios to take on CONSOL as an investment. Only those who can handle a highly volatile stock should consider CONSOL as a retirement-oriented stock.
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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