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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.
When investors want stable, steady dividend income, they often turn to utilities. But Exelon (NYSE: EXC ) isn't your run-of-the-mill utility. Unlike many of its peers, Exelon has a big commitment to nuclear power. That's been a big asset as oil prices rose and curbing carbon emissions became more of a priority, but the combination of Japan's nuclear disaster following last year's earthquake and low natural gas prices have pushed nuclear out of favor. Can Exelon rebound from its recent weakness to regain its place as an elite member of the utility set? Below, we'll revisit how Exelon 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 Exelon.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$32.6 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||0.54||Pass|
|Worst loss in past five years no greater than 20%||(29.9%)||Fail|
|Valuation||Normalized P/E < 18||11.93||Pass|
|Dividends||Current yield > 2%||5.5%||Pass|
|5-year dividend growth > 10%||3.6%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||68.8%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Exelon last year, the company has lost a point. A year of dropping revenue cut the utility's score, but far more important to Exelon's prospects will be how it responds to the current, more challenging environment.
Utilities in general had a strong year last year, as investors gravitated toward their high dividends and relative stability. Low natural gas prices allowed many utilities, especially American Electric Power (NYSE: AEP ) and Southern Company (NYSE: SO ) , to cut coal consumption and make plans to turn to cleaner-burning gas-fired generation facilities. But Exelon didn't benefit as much as most of its peers from that trend, as its nuclear exposure was a black mark against the stock in many investors' eyes.
Consolidation has played an ever more important role in the utility industry, with Exelon having just completed its merger with Constellation Energy to become the largest competitive energy provider in the country. Yet with Duke Energy (NYSE: DUK ) and Progress Energy (NYSE: PGN ) poised to close on their merger if they can get the deal past the Federal Energy Regulatory Commission, Exelon certainly can't take its leadership role for granted.
For retirees and other conservative investors, Exelon's dividend yield, well above 5%, provides an excellent incentive to take on some portfolio risk. With so much pessimism about prospects for nuclear power going forward, Exelon could easily get a boost just if overall sentiment shifts back to a more neutral stance. The combination of income and a possible rebound make Exelon an attractive candidate for many retirement portfolios.
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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