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Will Vale 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.

Nothing has been more instrumental in the rise of emerging-market countries in general and Brazil in particular than natural resources. With its vast mineral resources, Vale (NYSE: VALE  ) has made the most of a strong market for commodities, supported in large part by China's lightning-fast growth over the past decade. Yet, although commodity prices remain relatively high, Chinese demand appears to be slowing. How will Vale avoid falling as fast as it rose during the boom? Below, we'll revisit how Vale 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 Vale.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $115 billion Pass
Consistency Revenue growth > 0% in at least four of past five 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 0.72 Pass
  Worst loss in past five years no greater than 20% (62.4%) Fail
Valuation Normalized P/E < 18 7.86 Pass
Dividends Current yield > 2% 5.3% Pass
  5-year dividend growth > 10% 24.4% Pass
  Streak of dividend increases >= 10 years 3 years Fail
  Payout ratio < 75% 36.9% Pass
       
  Total score   8 out of 10

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

Since we looked at Vale last year, the company has gained a point. Continued growth in free cash flow helped boost Vale's score, but its stock has been punished in the past year, and the key to its future lies in what happens to overseas demand and market prices.

The past several years have been a roller-coaster ride for investors. Demand for iron ore and other metals that Vale produces was extremely strong until the commodity bust in 2008, which was followed by the financial crisis. From there, though, Vale recovered along with peers BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RIO  ) -- until last year. Now, with worries about China's economic prospects, demand for iron ore for steel production and other uses could be on the brink of falling precipitously.

One interesting and risky move that Vale made a few years ago was to build its own fleet of ore carriers. With a cost estimated at $10 billion, the decision may seem foolhardy given the glut of shipping capacity that has plagued carriers DryShips (Nasdaq: DRYS  ) and Navios Maritime Holdings (NYSE: NM  ) , among others. But if shipping rates ever rebound, then the move could prove prescient -- and quite profitable.

For retirees and other conservative investors, the fact that Vale is a featured holding in most emerging market ETFs ties its fortunes to general money flows in and out of those funds. As long as emerging markets remain popular, Vale should have a bid under its shares -- but if investors flee for the exits, Vale will look anything but the safe play in the Brazilian market.

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.

Add Vale to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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.


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Dan Caplinger
TMFGalagan

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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Related Tickers

12/19/2014 4:01 PM
VALE $8.14 Up +0.53 +6.96%
Companhia Vale Ads CAPS Rating: ****
BHP $48.39 Up +1.69 +3.62%
BHP Billiton Limit… CAPS Rating: ***
DRYS $1.01 Up +0.08 +8.02%
DryShips, Inc. CAPS Rating: ***
NM $4.18 Up +0.40 +10.58%
Navios Maritime Ho… CAPS Rating: ****
RIO $45.38 Up +1.06 +2.39%
Rio Tinto plc (ADR… CAPS Rating: ***

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