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.
As an electric and natural gas utility, PG&E (NYSE: PCG ) immediately evokes the kind of security and stability that makes conservative investors happy. But utilities have actually been fairly volatile lately, and with rapidly plunging natural gas prices, some utilities are benefiting at the expense of others. How will PG&E's place in the California market affect its prospects going forward? Below, we'll revisit how PG&E 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 PG&E.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$17.9 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.29||Pass|
|Worst loss in past five years no greater than 20%||(10.0%)||Pass|
|Valuation||Normalized P/E < 18||21.78||Fail|
|Dividends||Current yield > 2%||4.2%||Pass|
|5-year dividend growth > 10%||6.6%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||83.4%||Fail|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at PG&E last year, the company has lost two points. In 2011, the stock posted its worst annual loss in five years, and a drop in earnings sent valuations and its payout ratio rising.
Even though the utility industry generally did well last year, PG&E shows that some stocks missed out on the gains. In general, while pure-play electric utilities Southern Company (NYSE: SO ) and FirstEnergy (NYSE: FE ) did well as natural gas prices plunged, cutting costs, mixed utilities like PG&E that also serve natural gas customers didn't perform as well.
But PG&E has an interesting opportunity in its home market. The California Public Utility Commission plans to allow PG&E, along with San Diego Gas & Electric and the Southern California Electric subsidiary of Edison International (NYSE: EIX ) , essentially to bid on power from mid-sized renewable energy project developers. In conjunction with larger solar projects from First Solar (Nasdaq: FSLR ) and SunPower, the move will help boost California's presence in alternative energy.
For retirees and other conservative investors, it's troubling to see PG&E's dividend stay flat even as earnings fall. A 4%-plus yield is still attractive, but for PG&E to get back into the good graces of retirement investors, it needs to reverse those earnings declines and return to a stable growth path.
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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