Will Schlumberger 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.

Anyone who's ever read about gold rushes knows that it's far easier to make money providing necessary supplies to gold miners than it is to actually find and mine the gold yourself. Multiply that by about a million, and you get the basic business model of Schlumberger (NYSE: SLB  ) , the massive oil services company that helps give oil and gas exploration and production companies all the tools they need to get energy products out of the ground. Yet, as energy prices have fallen, can the oil service giant keep itself moving in the right direction? Below, we'll revisit how Schlumberger 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 Schlumberger.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$94.3 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

1 year

Fail

Stock stability

Beta < 0.9

1.41

Fail

 

Worst loss in past five years no greater than 20%

(56.5%)

Fail

Valuation

Normalized P/E < 18

20.49

Fail

Dividends

Current yield > 2%

1.5%

Fail

 

5-year dividend growth > 10%

10.6%

Pass

 

Streak of dividend increases >= 10 years

2 years

Fail

 

Payout ratio < 75%

25.3%

Pass

       
 

Total score

 

4 out of 10

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

Since we looked at Schlumberger last year, the company hasn't improved on its four-point score. The stock has also disappointed investors, falling about 10% over the past year.

Schlumberger is an industry leader with worldwide scope. Providing everything from drilling supplies and pipe fittings to imaging equipment and consulting services, Schlumberger aims to be a one-stop shop to the entire energy sector, and its international reach has definitely saved it from some local slowdowns in certain areas of the world.

But Schlumberger still faces tough competition in a difficult environment. Halliburton (NYSE: HAL  ) and Baker Hughes (NYSE: BHI  ) have more of a focus on North America, and with the revolution in shale drilling and other unconventional production methods, the continent is awash in relatively cheap oil and gas. Moreover, with National Oilwell Varco (NYSE: NOV  ) having bought Schlumberger's Wilson segment, which is a pipe, valve, and fitting specialist, competition between the two could get a lot fiercer, especially as National Oilwell Varco moves more strongly into international markets.

Schlumberger still has plenty of lucrative opportunities, though. Earlier this year, the Iraqi oil ministry started negotiations with Schlumberger and BP (NYSE: BP  ) to double the capacity of its northern oil fields.

For retirees and other conservative investors, Schlumberger doesn't deliver the dividend yield and value that you'd prefer to see in a retirement portfolio. With pressure from weak economies around the world and falling energy prices, you might do better waiting to see how the economic winds blow before even considering whether Schlumberger is a good fit among your holdings.

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.

Schlumberger may be an industry leader, but National Oilwell Varco has dominated its own niche of the market. National Oilwell Varco is poised to profit in a big way; its customers are both increasing the number of new drilling rigs as well as updating an aging fleet of offshore rigs. To help determine if the company is a nice fit for your portfolio, check out our premium research report with in-depth analysis on whether National Oilwell Varco is a buy today. For instant access to this valuable investor's resource, simply click here now and claim your copy today.

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