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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.
The race to find energy has never been more intense than it is today. Yet while many investors focus on the exploration and production companies that profit most from huge discoveries, oil services companies like Schlumberger (NYSE: SLB ) make money simply from looking for energy. Still, the Gulf oil spill brought to light many of the difficulties in drilling for oil and gas. Can Schlumberger stay strong in light of ever-changing conditions in the oil patch? 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 Schlumberger.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$100.5 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||2 years||Fail|
|Stock stability||Beta < 0.9||1.38||Fail|
|Worst loss in past five years no greater than 20%||(56.5%)||Fail|
|Valuation||Normalized P/E < 18||26.99||Fail|
|Dividends||Current yield > 2%||1.3%||Fail|
|5-year dividend growth > 10%||14.9%||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||27.1%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only four points, Schlumberger falls short on many of the traits that make conservative investors excited about a stock. With only a modest dividend, extreme volatility, and choppy free cash flow growth, the oil services giant doesn't match up with the ideal stock for a retirement portfolio.
Schlumberger sits atop the oil services industry, with a market cap that far exceeds that of competitors Halliburton (NYSE: HAL ) , Baker Hughes (NYSE: BHI ) , and Weatherford (NYSE: WFT ) -- combined. It provides not only drilling and well-related services but also has the world's largest seismic company under its corporate umbrella.
Schlumberger's leadership virtually guarantees getting in on some lucrative projects. For instance, the company has worked with Petrobras (NYSE: PBR ) in Brazil and with Chesapeake Energy (NYSE: CHK ) to use its new fracking technique in the Barnett shale.
But Schlumberger's huge scope doesn't guarantee positive results. In its most recent quarter, the company fell short of analyst expectations despite posting 49% higher revenue. Moreover, as Halliburton, Baker Hughes, and Weatherford, along with National Oilwell Varco (NYSE: NOV ) , pursue their respective niche strategies, Schlumberger could face growing challenges if it wants to maintain its leadership in the industry.
For retirees and other conservative investors, the modest dividend Schlumberger pays pales in comparison to other parts of the energy industry. Combined with a pricey valuation, you may want to hold off on adding Schlumberger to your retirement portfolio until the stock looks at least somewhat more attractive.
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."