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.
Telecom stocks around the world make attractive plays for retirees and other conservative investors. Solid, dependable revenue from stable landline customers helped make telecoms like utility stocks for decades. But with the mobile revolution, Philippine Long Distance (NYSE: PHI ) and its peers around the world have become potential growth giants. Are the Philippines ready for the same boost that other nations have seen? Below, we'll revisit how Philippine Long Distance 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 Philippine Long Distance.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$13 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|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%||(37.9%)||Fail|
|Valuation||Normalized P/E < 18||14.98||Pass|
|Dividends||Current yield > 2%||6.7%||Pass|
|5-year dividend growth > 10%||7.1%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||92.3%||Fail|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Philippine Long Distance last year, the company has lost three full points. Falling revenue, a reduction in dividend growth, and a rise in the company's payout ratio are all responsible for the score drop.
Around the world, telecom stocks have enjoyed great growth opportunities. Even in debt-riddled Europe, France Telecom (NYSE: FTE ) pays a double-digit dividend yield and has a commanding market share in its home country as well as some surrounding areas. In Southeast Asia, Telkom Indonesia (NYSE: TLK ) combines landlines, cell coverage, and TV for more than 130 million customers and maintains healthy dividends. Philippine Long Distance shares many of these same favorable traits.
But unlike nearby South Korean mobile company SK Telecom (NYSE: SKM ) , which has had very strong growth, Philippine Long Distance isn't the growth engine it once was. Revenue has fallen in each of the past two years, and the company's free cash flow has been inconsistent. In its most recent quarter, Philippine Long Distance had to write down some of its older assets as it builds out a more modern network, and revenue from voice and data services dropped even as its subscriber count rose.
For retirees and other conservative investors, Philippine Long Distance is a bit of a conundrum. The dividend yield is attractive, but with a valuation above many of its international telecom peers, you may be able to find better prospects for your retirement portfolio.
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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