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Will Vodafone Help You Retire Rich?

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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.

Vodafone (Nasdaq: VOD  ) isn't a household name in the U.S., but as it's a 45% owner of the Verizon Wireless joint venture with Verizon (NYSE: VZ  ) , most Americans are well aware of the industry in which Vodafone operates. With a worldwide reach, Vodafone has its hands in some promising markets, including fast-growing emerging nations. But can the company keep up the pace of innovation that has made it a world player? Below, we'll revisit how Vodafone 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 Vodafone.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $135 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 1 year Fail
Stock stability Beta < 0.9 0.39 Pass
  Worst loss in past five years no greater than 20% (42.9%) Fail
Valuation Normalized P/E < 18 12.85 Pass
Dividends Current yield > 2% 3.6% Pass
  5-year dividend growth > 10% 6.1% Fail
  Streak of dividend increases >= 10 years 12 years* Pass
  Payout ratio < 75% 64.7% Pass
       
  Total score   7 out of 10

Source: S&P Capital IQ. * As measured in British pounds. Total score = number of passes.

Since we looked at Vodafone last year, the company has kept its score of seven. But despite its huge reach, the company still faces the same competitive pressures as its peers.

Vodafone is based in the U.K., but it has operations around the world. From Australia to Latin America, Europe to Asia, you'll find Vodafone subsidiaries doing business. Interestingly, beyond its relationship with Verizon, Vodafone has had other minority positions in several mobile companies, including most notably China Mobile (NYSE: CHL  ) , although it has been selling off assets in order to build cash.

But the company faces competition at home. France Telecom (NYSE: FTE  ) has merged with Deutsche Telekom to create a U.K. entity that is now the biggest mobile company in that country. Telefonica's (NYSE: TEF  ) O2 unit also challenges the U.K. market. Still, Vodafone's international exposure is a good buffer against home-country competitors.

For retirees and other conservative investors, the big question is what Vodafone plans to do with its increasing cash hoard. It recently paid a special dividend as a result of money received from Verizon Wireless, but beyond that, it still has plenty more for other purposes. If it can grow and set the stage for continuing strength in the world mobile market, then Vodafone would make a smart choice for retirement investors.

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.

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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Telefonica and China Mobile. Motley Fool newsletter services have recommended buying shares of Vodafone Group, France Telecom, and China Mobile. 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)

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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 March 06, 2012, at 9:43 AM, bunngolf wrote:

    You can start by getting the yield correct. Using the most recent bi-annual dividends and the special dividend, using a $27.25 cost basis, the yield is 7.57%(over double what your state). Verizon has committed to share the wealth with their US partner Vodafone going forward. And VOD, being a very shareholder friendly company rewards its shareholders. Works for me!

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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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