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Will ConocoPhillips 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.

If being runner-up is a tough position for a company, then coming in at No. 3 is even harder. That's the situation that ConocoPhillips (NYSE: COP  ) had to deal with in the U.S. oil industry. But with the company having finally moved forward with its plan to split into two parts, things will look a lot different from the leaner exploration and production company. Will Conoco move forward strongly, or will it end up regretting its move to shed its midstream and downstream assets? Below, we'll revisit how ConocoPhillips 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 ConocoPhillips.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $67.5 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 1.14 Fail
  Worst loss in past five years no greater than 20% (39.8%) Fail
Valuation Normalized P/E < 18 5.38 Pass
Dividends Current yield > 2% 4.9% Pass
  5-year dividend growth > 10% 12.1% Pass
  Streak of dividend increases >= 10 years 11 years Pass
  Payout ratio < 75% 28.6% Pass
       
  Total score   8 out of 10

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

Since we looked at ConocoPhillips last year, the company has picked up a point. Faster revenue growth gave the oil giant the extra point, but everything will look much different for the company going forward.

Ever since Conoco said it would separate itself into two entities, investors have hoped for an outcome similar to what Marathon Oil (NYSE: MRO  ) saw. After Marathon split off its refining and marketing business into Marathon Petroleum (NYSE: MPC  ) , shares sputtered for a while, but then both stocks started taking off.

The same thing seems to be happening to Conoco right now. Both its shares and those of newly spun-off Phillips 66 (NYSE: PSX  ) have fallen from their post-spinoff levels, although a drop in oil prices below the $100 per barrel level may partially be to blame. Often, though, investors selling part of a spun-off entity bid prices too low, giving patient investors big bargains. But as the nation's second-biggest refiner, Phillips 66 definitely has big prospects for Conoco investors who hold onto their shares -- especially given the location of its refineries near strategically important crude oil delivery destinations.

In the meantime, Conoco is moving on with its upstream production assets. With lucrative prospects around the world, the company will have no shortage of upside even if oil prices don't move significantly higher from here.

For retirees and other conservative investors, spinoffs always present tough decisions. Don't let the 5% yield based on past payouts fool you, but the company said in a recent presentation that a 4.5% yield wasn't out of the question. Regardless, Conoco represents an interesting way to invest in a huge E&P pure play -- something that you won't find with integrated rivals ExxonMobil and Chevron (NYSE: CVX  ) . That alone may make Conoco worth a second look.

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 ConocoPhillips 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. Motley Fool newsletter services have recommended buying shares of ExxonMobil and Chevron. 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

8/29/2014 4:01 PM
COP $81.22 Up +0.56 +0.69%
ConocoPhillips CAPS Rating: *****
CVX $129.45 Up +0.70 +0.54%
Chevron CAPS Rating: ****
MPC $91.01 Up +0.23 +0.25%
Marathon Petroleum CAPS Rating: *****
MRO $41.69 Up +0.78 +1.91%
Marathon Oil Corp CAPS Rating: *****

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