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.
Rural telecoms may not be sexy, but they've been a hotbed of huge dividend payouts even in the relatively rich yield environment of the telecom industry overall. CenturyLink (NYSE: CTL ) is one of several players that has staked its claim to the potential growth from relatively forgotten areas of the country. Although some see rural telecom as a dying area, CenturyLink hopes to deliver modern services to those customers -- and reap the rewards of higher-margin products. Yet with the company having fallen out of the Dividend Aristocrats, does it have what it takes to go the distance? Below, we'll revisit how CenturyLink 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 CenturyLink.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$24.2 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%||(29.6%)||Fail|
|Valuation||Normalized P/E < 18||26.58||Fail|
|Dividends||Current yield > 2%||7.4%||Pass|
|5-year dividend growth > 10%||62.9%||Pass|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||317.8%||Fail|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at CenturyLink last year, the company has lost a point. CenturyLink didn't increase its dividend last year, breaking a 37-year streak -- but it still managed to hold its payout steady despite weak earnings.
In recent years, CenturyLink and its rivals have taken big steps to try to grow their businesses. CenturyLink merged with Qwest, while Frontier Communications (Nasdaq: FTR ) took a big bite out of Verizon's (NYSE: VZ ) legacy landline business. Windstream (Nasdaq: WIN ) , meanwhile, bought PAETEC for its huge fiber network to help expand its coverage area.
But those steps haven't always paid off. Frontier, in particular, has struggled as it has seen huge losses from customers cutting off their landlines in favor of mobile devices. That's a problem throughout the industry, but CenturyLink's shares haven't dropped nearly as much as Frontier's have.
Part of the explanation may be that CenturyLink is taking steps to go beyond simple telecom services. It bought Savvis last summer for $2.5 billion, giving it an entry into the cloud computing space that Verizon and AT&T (NYSE: T ) are already battling for. Even though acquisitions have given the company a big debt burden, they could pay off for CenturyLink in the long run if the company can integrate them and make them more profitable.
For retirees and other conservative investors, a 7%-plus dividend yield certainly looks attractive. If CenturyLink can get back to its previous level of earnings, then it might make a reasonable speculative addition to an aggressive 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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