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.
Few companies have anywhere near the reach that BHP Billiton (NYSE: BHP ) has over the natural resources market. With holdings in precious metals as well as industrial metals, along with energy sources ranging from oil and gas to coal, the company is a literal gold mine to anyone who needs products from the earth. But while demand from China helped put BHP where it is, slowing growth there could endanger the company's prospects going forward. How can the world's biggest mining company turn the tide? Below, we'll revisit how BHP Billiton 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 BHP Billiton.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$183 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||0.72||Pass|
|Worst loss in past five years no greater than 20%||(38.6%)||Fail|
|Valuation||Normalized P/E < 18||9.34||Pass|
|Dividends||Current yield > 2%||3.2%||Pass|
|5-year dividend growth > 10%||23.4%||Pass|
|Streak of dividend increases >= 10 years||10 years||Pass|
|Payout ratio < 75%||23.8%||Pass|
|Total score||9 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at BHP Billiton last year, the company has jumped two points, leaving its share-price volatility as the only blemish on its record. But that volatility has reared its head again lately, with shares down about a quarter over the past year as doubts arise about emerging-market demand.
For years, BHP Billiton has shared the task of meeting China's gluttonous demand for iron ore with Rio Tinto (NYSE: RIO ) and Vale (NYSE: VALE ) . With seemingly unlimited growth potential, China's long-term needs for improved infrastructure and construction activity still represent a big part of global commodities demand. Yet now that Chinese growth is finally showing signs of at least slowing somewhat, all three miners have seen their stocks punished. The slowdown is also having an impact on the copper business, which hits both BHP Billiton and Freeport-McMoRan Copper & Gold (NYSE: FCX ) as well.
But BHP Billiton's energy assets give it a big advantage over its competitors. Its purchase of Fayetteville assets from Chesapeake Energy (NYSE: CHK ) as well as its outright takeover of Petrohawk last summer gave it not only a position in lucrative shale-gas areas but also experience that it will be able to use around the world in other promising unconventional energy plays.
One interesting development for BHP Billiton involves rising interest in liquefied natural gas projects. With its strategically important geographical position, the company is in an excellent position to deliver LNG to Asian markets -- if demand is there by the time export terminals come on line.
For retirees and other conservative investors, though, BHP Billiton's steadily rising dividend shows just how successful the natural resources business has been over the past decade. If the tide is turning, then the company may be in for a rough ride -- but BHP Billiton has weathered storms before, and it will do so again.
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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