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Is National Grid 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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

Retirees and dividend-paying utilities go together like a horse and carriage. But not all utilities are the same. Electric provider National Grid (NYSE: NGG  ) gives investors an interesting and unusual combination: exposure to both U.S. and international markets. But is that a winning combination? 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 National Grid.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $33.6 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.27 Pass
  Worst loss in past five years no greater than 20% (36.8%) Fail
Valuation Normalized P/E < 18 11.33 Pass
Dividends Current yield > 2% 6% Pass
  5-year dividend growth > 10% 6.9% Fail
  Streak of dividend increases >= 10 years 2 years Fail
  Payout ratio < 75% 42.3% Pass
       
  Total score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

National Grid only scores five points, which isn't enough to give conservative investors everything they'd want from a stock. The dividend is valuable and looks solid, but inconsistent growth and the inherent uneven nature of international-stock dividends makes the payouts less predictable than with pure U.S. companies.

National Grid is a U.K.-based company that has a very strong competitive position across the Atlantic. In the U.S., the company operates in the Northeast and New England. But with electrical infrastructure in the U.K. in poor shape, National Grid did a secondary offering of shares back in 2010 that earned investors' ire for being dilutive.

Yet National Grid gets a huge portion of its income from the U.K., where service rates automatically adjust for inflation, so the move should pay off in the long run. Moreover, with expertise in rebuilding infrastructure, National Grid will have a competitive advantage when it comes time to make upgrades to its U.S. lines.

The big question, though, is how National Grid will respond to increasing consolidation in the industry. With huge mergers on the table, including Duke Energy's (NYSE: DUK  ) prospective buyout of Progress Energy (NYSE: PGN  ) and Exelon (NYSE: EXC  ) matching up with Constellation Energy (NYSE: CEG  ) , National Grid could find itself without a much-needed partner if it wants to expand beyond the northeastern corner of the U.S.

Retirees and other conservative investors like the 6% yield, though, which exceeds those of peers Southern (NYSE: SO  ) and American Electric Power (NYSE: AEP  ) . If the economy continues to strengthen, then increased demand for electricity should keep those dividend checks coming -- and growing -- for the foreseeable future.

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 National Grid 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. Motley Fool newsletter services have recommended buying shares of National Grid, Southern, and Exelon, as well as writing a covered strangle position in Exelon. 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 (5)

Comments from our Foolish Readers

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 December 27, 2011, at 6:18 PM, bikerguy1 wrote:

    NGG has raised its dividend for more than 10 years. Since the company is in the UK you need to look at the dividends on the ordinary shares. Looking at the ADR and $ converted dividends allows the change in exchange rates to give an incorrect impression.

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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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