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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 banking crisis in Europe has gained worldwide notoriety, and one of the stocks near the epicenter of the trouble is Spain's Banco Santander (NYSE: STD ) . But what many fail to realize about the Spanish bank is that it has a separately traded Brazilian subsidiary, Banco Santander Brasil (NYSE: BSBR ) . Brazil's economy is doing quite well, so it's reasonable to expect better numbers for the Latin American company than for its Spanish parent. Below, we'll look at how Banco Santander Brasil 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 Banco Santander Brasil.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$30.2 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||0.97||Fail|
|Worst loss in past five years no greater than 20%||(54.9%)||Fail|
|Valuation||Normalized P/E < 18||8.09||Pass|
|Dividends||Current yield > 2%||4.3%||Pass|
|5-year dividend growth > 10%||NM||NM|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||50.3%||Pass|
|Total score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Banco Santander Brasil had its U.S. IPO in October 2009 and paid its first dividend shortly thereafter. Total score = number of passes.
With five points, Banco Santander Brasil clearly hasn't avoided all the turmoil that hurt the portfolios of conservative investors over the past several years. But despite the name association that investors have with its Spanish relative, the Brazilian bank offers access to Latin America's growth -- as well as some healthy dividends -- without the baggage of European risk.
Banco Santander Brasil couldn't have picked a worse time to come public. It was one of only three IPOs for more than $1 billion in 2009. Yet the move gave its Spanish parent some flexibility to raise capital if necessary. With it retaining an ownership of Banco Santander Chile (NYSE: SAN ) as well, Spain's Santander would find it much easier to float a secondary offering of either entity than run through an IPO under fire-sale conditions.
Moreover, economic conditions in Brazil may be starting to deteriorate. Homebuilder Gafisa (NYSE: GFA ) , which is also sensitive to interest rates, has seen its stock plummet in recent months as fears of an overheating economy and tightening of interest rates partially offset the falling unemployment within Latin America's leading economic power. Even Brazil's oil giant, Petrobras (NYSE: PBR ) , has badly lagged its Big Oil peers on fears that Brazil's fast-growth phase may be ending.
For retirees and conservative investors, though, it's easy to take some comfort in Banco Santander Brasil's trailing dividend yield of more than 4%. That's markedly down from 2010's levels, but therein lines much of the appeal -- anything short of economic Armageddon should give the stock quite a bit of room to run. If you're afraid of U.S. banks, you may want to consider Banco Santander Brasil as an alternative.
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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