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 Chesapeake Energy (NYSE: CHK ) 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 Chesapeake Energy.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$18.9 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||1 year||Fail|
|Stock stability||Beta < 0.9||1.24||Fail|
|Worst loss in past five years no greater than 20%||(58.4%)||Fail|
|Valuation||Normalized P/E < 18||23.20||Fail|
|Dividends||Current yield > 2%||1.2%||Fail|
|5-year dividend growth > 10%||8.4%||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||36.5%||Pass|
|Total score||2 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just two points, Chesapeake Energy lacks the stable growth and consistent strong dividend payouts that many conservative investors look for in an ideal stock. The natural gas leader hasn't seen commodity prices move its way lately, but the company is taking steps now to try to remedy that situation going forward.
Chesapeake is one of the country's largest natural gas producers. Unlike just about every other commodity out there, natural gas prices have remained stubbornly low. In fact, along with Range Resources (NYSE: RRC ) , Chesapeake's cost of production is above the market price for gas, putting it in the awkward situation of either cutting production or keeping operations going at a loss. By contrast, Ultra Petroleum (NYSE: UPL ) and Southwestern Energy (NYSE: SWN ) have much lower production costs, giving them a big competitive advantage over Chesapeake.
Another problem for shareholders has come from the corner office. Chairman and CEO Aubrey McClendon is a controversial figure who has gotten criticism for his rich compensation packages. Especially with natural gas prices still in the cellar after a nice run-up several years ago, the fact that McClendon's pay isn't tied to performance rankles many investors.
With gas such a disappointment, Chesapeake has taken steps to diversify its portfolio with oil and other liquids. Along with partner CNOOC (NYSE: CEO ) , Chesapeake is the largest player in the Eagle Ford shale area, which has produced oil, gas liquids, and regular natural gas.
Nevertheless, Chesapeake's long-term future still primarily revolves around natural gas prices. Years of negative cash flow show just how problematic the current environment is for the company. Until gas prices return to higher, more normal levels, Chesapeake's stock is a tough sell for retirees and other conservative investors.
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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