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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 Philippine Long Distance (NYSE: PHI ) 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 Philippine Long Distance.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10.6 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||0.27||Pass|
|Worst loss in past five years no greater than 20%||(37.9%)||Fail|
|Valuation||Normalized P/E < 18||13.60||Pass|
|Dividends||Current yield > 2%||9.0%||Pass|
|5-year dividend growth > 10%||17.4%||Pass|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||71.8%||Pass|
|Total score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Philippine Long Distance calls in with seven points, giving conservative investors much of what they like to see in a stock. Like many other telecom companies around the world, Philippine Long Distance delivers hefty dividend yields and relatively low volatility.
When it comes to big payouts, dividend investors flock to telecoms, especially those with big legacy landline businesses as Philippine Long Distance has. Here in the U.S., Frontier Communications (NYSE: FTR ) and Windstream (Nasdaq: WIN ) are among the top-yielding stocks in the market as they bring in reliable streams of income from customers who still look to old technology for their phone needs. Philippine Long Distance has served the same need in its country.
Yet like AT&T (NYSE: T ) and Verizon (NYSE: VZ ) , Philippine Long Distance also serves as a big presence in the wireless service market. Recently, it announced it would buy out competitor Digitel, which was growing much faster in the cellular phone market. The move will boost the company's share of fixed lines, cell subscribers, and broadband Internet users substantially, all at a reasonable price.
With a combination of great income and good growth prospects, Philippine Long Distance gives retirees and other conservative investors a great combination. If you haven't looked overseas for great stocks for your retirement portfolio, Philippine Long Distance may be a good place to start.
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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