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Is Exelon the Right Stock to Retire With?

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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 Exelon (NYSE: EXC  ) 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 Exelon.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $27.9 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 0.62 Pass
  Worst loss in past five years no greater than 20% (29.9%) Fail
Valuation Normalized P/E < 18 10.85 Pass
Dividends Current yield > 2% 5% Pass
  5-year dividend growth > 10% 5.6% Fail
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 56% Pass
       
  Total score   6 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With six points, Exelon has much of what conservative investors want from a stock. Despite some free cash flow problems and dividend growth that has flattened out over the past few years, the utility pays a reasonable yield and has seen its stock stay relatively stable during recent turbulent times for the market.

Exelon has positioned itself as a leading utility for the nation. As government looks for alternatives to fossil fuels as a way to meet the country's growing demand for electrical generation, Exelon has primarily focused on nuclear power, which makes up 93% of its power generation portfolio.

After the Japanese earthquake, though, some are questioning nuclear energy as a viable source of power. NRG (NYSE: NRG  ) is writing off its investment in its suspended South Texas Nuclear Development Project, which will cost the company nearly $500 million. Uranium miners Cameco (NYSE: CCJ  ) and Uranium Energy (AMEX: UEC  ) have also seen big drops in their share price.

Despite inevitable concerns, though, Exelon should come through the episode unscathed. Nuclear energy represents 20% of power generation in the U.S., and an easy replacement for that energy isn't available in the short run. In fact, with shares now yielding more than 5%, Exelon could be giving a good buying opportunity to retirees and other conservative investors looking for a strong long-term holding for their stock portfolios.

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.

Add Exelon to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool Options has recommended a covered strangle position on Exelon, which is a Motley Fool Inside Value choice. 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.


Read/Post Comments (1) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 14, 2012, at 10:33 AM, webmind wrote:

    With an explosion of natural gas becoming available in the US due to rapidly advancing extraction technology, this could spell trouble for this stock.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

12/19/2014 4:02 PM
EXC $37.61 Up +0.08 +0.21%
Exelon CAPS Rating: ****
CCJ $16.44 Up +0.29 +1.80%
Cameco Corp (USA) CAPS Rating: *****
NRG $27.02 Down -0.74 -2.67%
NRG Energy, Inc. CAPS Rating: ****
UEC $1.68 Down -0.09 -5.08%
Uranium Energy Cor… CAPS Rating: **

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