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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. Let's figure out what makes a great retirement-oriented stock, then examine whether Sasol (NYSE: SSL ) has what we're looking for.
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 Sasol.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$33.1 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||4 years||Pass|
|Stock stability||Beta < 0.9||0.50||Pass|
|Worst loss in past five years no greater than 20%||(37.2%)||Fail|
|Valuation||Normalized P/E < 18||14.83||Pass|
|Dividends||Current yield > 2%||2.8%||Pass|
|5-year dividend growth > 10%||12.9%||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||37.2%||Pass|
|Total score||8 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Sasol racks up eight points, showing that it has many traits that are attractive to conservative investors. The South African energy giant isn't as well-known as some of its peers around the world, but the company has a strong history and some promising prospects for the future.
During the oil boom in 2007 and 2008, Sasol performed strongly, with good results from its coal-based synthetic fuel business as well as healthy growth in its international operations, which include areas from Mozambique and Gabon to China. But the ensuing drop in energy prices in the second half of 2008 caused Sasol's stock to post big losses.
But now, the stock has recovered, and the search for unconventional energy sources has brought Sasol an interesting find close to home. Over the past year or two, the company has been exploring possible shale gas reserves in South Africa's Karoo Basin. Sasol is teaming up with Statoil (NYSE: STO ) and Chesapeake Energy (NYSE: CHK ) in the search. And although the company faces competition from the likes of Royal Dutch Shell (NYSE: RDS-A ) , Sasol should have a home-field advantage in working with government agencies to start drilling if the area proves to be productive.
In addition, the company still maintains a big presence internationally. Late last year, the company agreed to buy into the Canadian shale gas arena by buying out a portion of Talisman Energy's (NYSE: TLM ) interest in a promising gas play. Some were concerned that Sasol paid too much, but if nothing else, the buy shows how serious Sasol is in making a splash in energy markets around the world.
Like other energy companies, Sasol has plenty of exposure to oil and gas prices, so as past stock performance shows, it's not necessarily for the faint of heart. But with a dividend yield of almost 3% and healthy payout growth, retirees and other conservative investors will probably be happy with what they see at Sasol.
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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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.