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 you're looking for a company with a stranglehold over the most populous nation in the country, China Mobile (NYSE: CHL ) is a reasonable bet. With commanding market share over its domestic peers and roughly 650 million subscribers, China Mobile has done an excellent job of getting Chinese residents onto its mobile phone network. But can the telecom giant continue to hold off competition in the ever-growing market? Below, we'll revisit how China Mobile 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 China Mobile.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$218 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.53||Pass|
|Worst loss in past five years no greater than 20%||(41.7%)||Fail|
|Valuation||Normalized P/E < 18||12.92||Pass|
|Dividends||Current yield > 2%||3.8%||Pass|
|5-year dividend growth > 10%||14.2%||Pass|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||41.8%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at China Mobile last year, the company has kept its eight-point score. The mobile provider has also seen strong, share-price growth, which is especially impressive as the Chinese stock market has struggled.
China Mobile has a big chunk of the Chinese telecom market. But one concern that investors have is that China Mobile's strength comes largely from the older 2G phone market. In more advanced 3G phones, it has a much smaller 43% market share.
Interestingly, China Mobile has thrived even without the iPhone. Limitations in network compatibility forced Apple (Nasdaq: AAPL ) to go with competing providers China Unicom (NYSE: CHU ) and China Telecom (NYSE: CHA ) instead. But if Apple follows through with technology expected to allow its upcoming iPhone 5 to work on China Mobile's TD-SCDMA network, then it could open the door to huge additional growth.
Meanwhile, other handset makers are trying to get their fingers into the market, which should help boost China Mobile's position as well. Microsoft and Nokia (NYSE: NOK ) have looked into bringing their own smartphone lines to China, where they could go up against Apple and other phone makers. With its dominant position, China Mobile will have significant leverage in defining the terms of all of its relationships with phone providers.
For retirees and other conservative investors, China Mobile is a relatively safe play in what has been a turbulent market lately. The telecom company certainly faces some challenges, but overall, investors looking for a stock with Chinese exposure could do far worse than choosing China Mobile.
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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