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 energy industry has been a tale of two segments in recent years. On one hand, exploration and production activity has boomed in light of new finds from unconventional drilling methods. On the other, though, refiners have seen some big challenges from the difficulties of transporting energy products from remote areas as well as issues with geopolitical tensions. Because of that disparity, Marathon Oil (NYSE: MRO ) chose to split off its downstream operations, leaving it as a pure exploration and production company. Will that work for both entities? Below, we'll revisit how Marathon Oil 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 Marathon Oil.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$18 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||1 year||Fail|
|Stock stability||Beta < 0.9||1.33||Fail|
|Worst loss in past five years no greater than 20%||(54%)||Fail|
|Valuation||Normalized P/E < 18||6.42||Pass|
|Dividends||Current yield > 2%||2.7%||Pass|
|5-year dividend growth > 10%||3.4%*||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||21.5%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes. * Adjusted for spinoff.
Since we looked at Marathon Oil last year, the company has kept its four-point score. The stock has dropped 20%, however, as prospects for the energy industry aren't quite as good as they were this time last year.
Marathon's revolutionary decision to split up its business by spinning off Marathon Petroleum (NYSE: MPC ) attracted a lot of attention and inspired some copycat moves. With ConocoPhillips (NYSE: COP ) having made a similar move with its Phillips 66 (NYSE: PSX ) spinoff of downstream operations, investors are finding it increasingly difficult to get exposure to wholly integrated oil companies.
Nevertheless, Marathon has a number of lucrative prospects. Exposure to the Bakken and Eagle Ford shale plays holds huge potential, but perhaps what's most interesting is its presence off the coast of Norway, near where Statoil (NYSE: STO ) has made some promising discoveries. With Marathon having acquired a stake in the Vilje field from Statoil, it could greatly benefit from further finds there.
Of course, the recent drop in oil prices has disrupted the entire energy sector, pushing share prices of Marathon and its peers lower. Although natural gas prices have encouragingly bounced off their recent lows, uncertainty in the energy markets definitely has had an impact on Marathon's stock.
For retirees and other conservative investors, Marathon Oil has made a good start in its independent existence. But until it has a longer track record under its belt, investors may do better to wait and see before considering making Marathon Oil part of their 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.
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