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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.
What We Want to See
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.
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.