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Is France Telecom the Right Stock to Retire With?

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.

Factor

What We Want to See

Actual

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.

Keep searching
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.

Add France Telecom to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Telefonica. Motley Fool newsletter services have recommended buying shares of Vodafone Group and France Telecom. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2011, at 12:43 PM, BellbrookCPA wrote:

    What about foreign tax withholdings on FTE, TEF or PT ? Would this reduce the amount of dividend income if this is in an IRA ?

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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