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.
China has been a growth machine for years, and like any growing economy, China needs energy resources in order to fuel its expansion. That's where CNOOC (NYSE: CEO ) comes in, with an appetite for acquiring natural resources from across the globe. But with China's economy finally starting to slow down, will CNOOC's buying spree slow down with it? Below, we'll revisit how CNOOC 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 CNOOC.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$85.3 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||3 years||Fail|
|Stock stability||Beta < 0.9||1.28||Fail|
|Worst loss in past five years no greater than 20%||(43.5%)||Fail|
|Valuation||Normalized P/E < 18||9.33||Pass|
|Dividends||Current yield > 2%||3.7%||Pass|
|5-year dividend growth > 10%||10.4%||Pass|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||29.7%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at CNOOC last year, the company's score has dropped by a point. Even though the stock is down about 10% in the past year, the Chinese energy giant has worked hard to build both resources and knowledge with which to develop promising shale-gas assets in its own country.
China's energy needs are vast, but CNOOC and its Chinese peers are working hard to meet them. On one hand, outright acquisitions have added to total resources, with CNOOC's deal earlier this week to buy Canada's Nexen (NYSE: NXY ) for $15.1 billion just the latest addition to its extensive portfolio. Subject to Canadian government approval, Nexen will give CNOOC greater exposure in the North Sea, Gulf of Mexico, and Nigeria, as well as western Canada.
On the other hand, CNOOC has been gaining expertise it hopes to apply to Chinese exploration and production. Last year, it spent $1 billion to enter a joint venture with Chesapeake Energy (NYSE: CHK ) that gave it exposure to Chesapeake's experience with unconventional gas drilling techniques.
But CNOOC isn't the only Chinese energy company competing for assets. Sinopec paid Devon Energy (NYSE: DVN ) $2.2 billion for a one-third interest in its holdings across five different shale plays in the U.S., and PetroChina has worked with Royal Dutch Shell (NYSE: RDS-A ) in Canada, as well as in drilling the first horizontal gas well in the Sichuan province of China.
For retirees and other conservative investors, CNOOC's status as a state-controlled entity should make would-be shareholders pause. However, if you can come to grips with the political risk, the stock has favorable fundamental traits, including a healthy and growing dividend as well as a cheap valuation. That may be enough for some risk-tolerant investors to give CNOOC a closer look.
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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