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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.
Verizon (NYSE: VZ ) has two very different businesses under one roof. On one hand, it has retained some of its legacy landline customers, seeking to provide voice, data, video, and Internet access via hardwire services. Yet it also has a majority stake in its Verizon Wireless joint venture with Vodafone (Nasdaq: VOD ) , where it has a lot more growth potential. So will the company keep both of its businesses generating profits? Below, we'll revisit how Verizon 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 Verizon.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$108 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||4 years||Pass|
|Stock stability||Beta < 0.9||0.53||Pass|
|Worst loss in past five years no greater than 20%||(18.1%)||Pass|
|Valuation||Normalized P/E < 18||16.52||Pass|
|Dividends||Current yield > 2%||5.2%||Pass|
|5-year dividend growth > 10%||4%||Fail|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||231.1%||Fail|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Verizon last year, the company has kept its 7-point score intact. Despite concerns about a high payout ratio, Verizon has managed not only to keep its dividend but to raise it.
Verizon has weathered the recent mobile storm quite well. Not only did rival AT&T (NYSE: T ) miss out on its plan to merge with T-Mobile, but Verizon has made a smart deal of its own. It recently picked up some extremely valuable wireless spectrum licenses from a consortium of cable companies that includes Comcast (Nasdaq: CMCSA ) and Time Warner Cable, agreeing also to resell wireless services through those companies. That deal is attracting government scrutiny, but it's too early to know if there's a big threat to the agreement.
Meanwhile, Verizon's moves to get rid of some of its legacy landline business appear to have gone well. After an $8.5 billion deal with Frontier Communications (Nasdaq: FTR ) to take over the business in 14 states, Verizon's landline footprint is a lot smaller than it was. At the same time, Verizon has signed up CenturyLink to resell Verizon wireless plans.
For retirees and other conservative investors, the key is whether Verizon can keep growing and sustain its dividend. The capital expenditures necessary to maintain its network have pushed free cash flow down in the past year. That's a warning sign, but at least so far, it isn't pointing to imminent problems for those who have Verizon in their retirement portfolios.
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.
If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
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