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.
The mining industry has a decidedly international bent to it, with U.S. companies often failing to reach the top three spots in key metals and other resources. Iron ore is a great example, where Rio Tinto (NYSE: RIO ) is part of a triumvirate of foreign companies that provide huge portions of the raw materials that countries like China need to produce steel and other construction-based products. With China starting to slow down, however, some question whether Rio Tinto and its peers will be able to sustain their current business levels. What will the future bring for big mining? Below, we'll revisit how Rio Tinto 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 Rio Tinto.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$78.6 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||3 years||Fail|
|Stock stability||Beta < 0.9||1.20||Fail|
|Worst loss in past five years no greater than 20%||(79.1%)||Fail|
|Valuation||Normalized P/E < 18||5.88||Pass|
|Dividends||Current yield > 2%||3.4%||Pass|
|5-year dividend growth > 10%||6.9%||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||38.4%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Rio Tinto last year, the company has kept its five-point score. But its stock price has plunged by more than a third in the past year on fears related to the global slowdown.
Throughout the industry, mining companies have had the wind taken out of their share-price sails. BHP Billiton, Vale (NYSE: VALE ) , and Rio Tinto have all seen big stock drops, with Vale losing nearly half its value from its highs last summer.
One area in particular where Rio Tinto is suffering is in aluminum. Just as Alcoa (NYSE: AA ) has gotten hurt badly by low aluminum prices and questionable demand, Rio Tinto CEO Tom Albanese said earlier this year that he "can't predict when the price [of aluminum] will recover."
But not everyone believes that the Chinese growth story is done. General Electric (NYSE: GE ) recently bought Industrea, an Australian mining equipment maker that has both Rio Tinto and BHP Billiton as customers. GE clearly believes that there's still long-term potential in China, and if it's right, then Rio Tinto should get another chance at the apple before too long.
One issue that's come up is whether Rio Tinto wants to do a big acquisition. After regulators put a stop to its combination with BHP Billiton, Rio Tinto raised speculation that it might want to buy out Freeport-McMoRan Copper & Gold (NYSE: FCX ) . Freeport doesn't appear to be focusing on finding a buyer at this point, but with valuations throughout the industry falling, consolidation could be coming.
For retirees and other conservative investors, Rio Tinto has been a very volatile stock that has had successive boom and bust years for quite a while. Even with the potential in natural resources, Rio Tinto is a stock that's only for those who are comfortable taking a wild ride in turbulent markets.
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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