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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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
Around the world, telecom stocks have had a decades-old reputation for stability and strong dividends. Yet the mobile revolution has thrust many of these companies into the unfamiliar role of becoming growth giants. Although plenty of U.S. carriers get investor attention, overseas opportunities like Nippon Telegraph & Telephone (NYSE: NTT ) largely go unnoticed. Is the Japanese telecom a better buy? Below, we'll look at how the company does on our 10-point scale.
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 NT&T.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$63.6 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||1 year||Fail|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.34||Pass|
|Worst loss in past five years no greater than 20%||(21.9%)||Fail|
|Valuation||Normalized P/E < 18||6.98||Pass|
|Dividends||Current yield > 2%||3.6%||Pass|
|5-year dividend growth > 10%||13.2%||Pass|
|Streak of dividend increases >= 10 years||10 years||Pass|
|Payout ratio < 75%||32.3%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of eight, NT&T meets nearly all the tests that conservative investors have for retirement-oriented stocks. Moreover, the company's recent weakness in revenue growth has largely involved drops of less than 1%, while free cash flow has grown convincingly.
Like most telecoms these days, NT&T has a backbone of legacy voice telephone services that it offers to business and residential customers, as well as integrated digital networks that carry voice, data, and video content. So far, the company gets essentially all its revenue from its domestic Japanese market, which has produced relatively low returns on equity that pale in comparison to international peers like France Telecom (NYSE: FTE ) and China Mobile (NYSE: CHL ) .
But recently, NT&T has expanded into emerging markets. Just as Telefonica (NYSE: TEF ) has insulated itself partially from its domestic woes by gaining emerging-market exposure, so too could NT&T get some diversification from its moves -- although the amounts involved are insignificant at present.
NT&T trades at an extremely cheap valuation, but one reason why may be that its dividend is relatively low for the space. Here in the U.S., smaller telecoms like Frontier Communications (NYSE: FTR ) and CenturyLink (NYSE: CTL ) have much higher yields. Given that NT&T has plenty of room on the payout-ratio front to pay more, a boost could increase interest in the shares.
For retirees and conservative investors, the lack of familiarity in foreign telecoms largely explains why NT&T flies under the radar. But with stability and dividend growth, the stock is worth taking a look at for a low-risk retirement portfolio.
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."