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 Cablevision Systems (NYSE: CVC ) 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 Cablevision Systems.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$4.8 billion||Fail|
|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||5 years||Pass|
|Stock stability||Beta < 0.9||1.54||Fail|
|Worst loss in past five years no greater than 20%||(30.5%)||Fail|
|Valuation||Normalized P/E < 18||12.93||Pass|
|Dividends||Current yield > 2%||3.5%||Pass|
|5-year dividend growth > 10%||14.5%*||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||36.6%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's.
*Three-year dividend growth rate since Cablevision started paying a dividend in August 2008.
Total score = number of passes.
With six points, Cablevision Systems broadcasts some good results for conservative investors looking to bolster their retirement portfolios. But the company has seen its business split in two, with disturbing losses in video customer counts only partially offset by increasing demand for high-speed broadband Internet service.
Cable companies have had a hard time keeping customers for their traditional video business. Both Cablevision and Comcast (Nasdaq: CMCSA ) saw dips in customer counts last year, and that trend has continued this year, with Cablevision and DISH Network (Nasdaq: DISH ) seeing substantial drops in the second quarter.
But the same trends that are causing regular cable customers to bolt are also supporting Cablevision's broadband business. With Google (Nasdaq: GOOG ) and Verizon (NYSE: VZ ) reportedly having plans to build "superfast" network connections, broadband providers like Time Warner Cable (NYSE: TWC ) and Cablevision will likely follow Comcast's lead in experimenting with ways to provide higher-speed service.
Cablevision isn't exactly the type of calm stock that retirees and other conservative investors prefer to own. In an ever-changing business, the stock will inevitably rise and fall sharply. But if Cablevision can stay ahead of the curve, it could be a reasonable addition for risk-tolerant 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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