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.
When it comes to mining, gold gets all the glory. Yet during times of economic expansion, less pricey metals like copper can actually deliver even stronger gains that the more popular yellow precious metal. If you can't decide which you like better, though, then don't decide -- Freeport-McMoRan Copper & Gold (NYSE: FCX ) gives you exposure to both. But with the global economy showing signs of stress on multiple fronts, will tough times crater the stock? Below, we'll revisit how Freeport-McMoRan Copper & Gold 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 Freeport-McMoRan Copper & Gold.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$29.8 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||2 years||Fail|
|Stock stability||Beta < 0.9||1.95||Fail|
|Worst loss in past five years no greater than 20%||(75.5%)||Fail|
|Valuation||Normalized P/E < 18||6.23||Pass|
|Dividends||Current yield > 2%||4%||Pass|
|5-year dividend growth > 10%||14.9%||Pass|
|Streak of dividend increases >= 10 years||3 years||Fail|
|Payout ratio < 75%||31.9%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Freeport-McMoRan Copper & Gold last year, the company has kept its five-point score. Falling revenue cost the company a point, but higher dividend growth earned it back, although the stock still dropped by more than 40% over the past year.
Freeport certainly has a lot going for it. With 33.9 million ounces of proven and probable gold reserves to go with 119 billion pounds of copper and 3.4 billion pounds of molybendum, the company's $30 billion market cap seems like a steal. Moreover, that doesn't even include the favorable cash position that Freeport has, in stark contrast to the net debt that competitors Southern Copper (NYSE: SCCO ) and Rio Tinto (NYSE: RIO ) have.
But the company also faces some challenges. Its huge Grasberg mine in Indonesia has caused controversy, with labor problems and a new law requiring that Freeport sell off at least 20% of the mine. The economic slowdown pushed down the company's metals sales in its most recent quarter, as average realized copper prices fell 16% from the year-ago quarter. As we saw with molybdenum specialist Thompson Creek Metals (NYSE: TC ) , Freeport realized 15% less for the molybdenum it sold as well.
Looking forward, a lot depends on new projects from Thompson Creek and Ivanhoe Mines (NYSE: IVN ) , which could bring bigger supplies of copper onto the market, depressing prices. At the same time, though, investor interest in copper is high, and new ETFs could take copper inventories off the market and boost prices.
For retirees and other conservative investors, Freeport's low earnings multiple is typical for what appears to be a down phase in the economic cycle. But if you think economic fears are overblown, then Freeport might well be worth dabbling in for the more speculative part of your 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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