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 France Telecom (NYSE: FTE ) 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 France Telecom.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$44.4 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||0.35||Pass|
|Worst loss in past five years no greater than 20%||(14.6%)||Pass|
|Valuation||Normalized P/E < 18||9.06||Pass|
|Dividends||Current yield > 2%||11.4%||Pass|
|5-year dividend growth > 10%||7.0%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||119.6%||Fail|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, France Telecom gives conservative investors several of the things they like to see in a stock. The telecom giant has always paid strong dividends, but a weak share price has helped boost yields to double-digit levels.
The European sovereign debt crisis still finds itself front-and-center on the minds of investors around the world, and shares of European companies have reeled from the crisis. Along with fellow telecoms Portugal Telecom (NYSE: PT ) and Telefonica (NYSE: TEF ) , France Telecom has seen its dividend yield climb substantially despite having kept its dividend unchanged for the past several years.
Still, from an operational standpoint, France Telecom is holding its own. Like Telefonica and Vodafone (Nasdaq: VOD ) , France Telecom has plenty of exposure to regions outside Europe. For instance, growth in its emerging-markets mobile business helped push its customer base up 7% over the past year.
One concern for retirees and other conservative investors is the fact that France Telecom's dividend payout ratio is approaching 120%, showing that the company is paying out more money than it's earning. With contracting earnings over the past several years, the company is facing a trend that could hurt its shares further and eventually may lead to a dividend cut. But for now, the combination of a beaten-down stock has pushed yields to levels that only Frontier Communications (NYSE: FTR ) can match among U.S. telecoms.
For now, though, the shares look like a good value. For those investors willing to take risks with their retirement portfolio, France Telecom could well pay off in the long run.
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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