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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 Telefonica (NYSE: TEF ) 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 Telefonica.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$103.9 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.59||Pass|
|Worst loss in past five years no greater than 20%||(30.6%)||Fail|
|Valuation||Normalized P/E < 18||10.94||Pass|
|Dividends||Current yield > 2%||10.7%||Pass|
|5-year dividend growth > 10%||22.9%||Pass|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||61.5%||Pass|
|Total score||7 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of seven, Telefonica delivers a lot of what conservative investors want to see from a stock. The telecom is smack-dab in the middle of European chaos, but thus far, it hasn't done any damage to the stock.
Spain has been one of the hardest-hit major economies in Europe. With unemployment in the country running at 20%, many fear that problems in smaller countries like Greece, Portugal, and Ireland could end up spreading to Spain.
With that as background, investing in Spain's biggest telecom company might seem like a big mistake. Recently, the company's results in its Spanish home market have been mixed, with falling revenue and increased competition offset by rising mobile customer counts. But Telefonica has exposure well beyond its home market, with penetration not just throughout the rest of Europe but also in high-growth areas of Latin America as well.
Of course, global telecoms are all fighting for domination in Europe and elsewhere. Between U.K.-based Vodafone (Nasdaq: VOD ) , Italy's Telecom Italia (NYSE: TI ) , and France Telecom (NYSE: FTE ) , wireless adoption has never been higher as landlines are in decline. But the company scored a recent victory in Mexico, as America Movil (NYSE: AMX ) got hit with a $1 billion fine for anticompetitive behavior in a market that should benefit Telefonica.
After long being a haven for calm performance and solid dividends, telecom stocks now present a much different picture to retirees and other conservative investors. Intense competition and big growth opportunities have made telecoms much riskier, but with higher potential returns as well. Despite Europe's troubles, Telefonica deserves a closer look for those seeking to add income-producing power to their retirement 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.