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.
Amid a lost decade for stocks, gold was one of the best-performing assets of the 2000s, and gold miners like Barrick Gold (NYSE: ABX ) did a good job of cashing in on the gold craze. More recently, though, appetites for the yellow metal have started to wane, calling into question the bull market for gold and mining stocks. Can Barrick keep moving forward? Below, we'll revisit how Barrick 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 Barrick Gold.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$34.6 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.43||Pass|
|Worst loss in past five years no greater than 20%||(14.3%)||Pass|
|Valuation||Normalized P/E < 18||8.57||Pass|
|Dividends||Current yield > 2%||2.3%||Pass|
|5-year dividend growth > 10%||19%||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||15.1%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Barrick Gold last year, the company has gained a point. A big boost in its dividend yield gave it the extra score boost, but shareholders aren't very happy about the stock's 30% drop over the past year.
Barrick is one of the largest gold miners in the world. But it was also among the last to get rid of its production hedges, waiting until 2009 to take full advantage of the rise in gold prices. By contrast, Newmont Mining (NYSE: NEM ) and Goldcorp (NYSE: GG ) both freed themselves of hedges significantly before Barrick.
Still, Barrick hasn't been able to avoid the malaise that many gold miners have suffered this year. As prices have slipped from above $1,900 per ounce to around $1,600, miners have gotten slammed a lot harder.
Much of the trouble comes from high production costs. Barrick recently decided to defer the development of both its Chilean Cerro Casale mine, which it shares with Kinross Gold (NYSE: KGC ) , and its Donlin Creek joint venture with NovaGold Resources (NYSE: NG ) . Moreover, huge cost increases for other mining projects support the notion that gold prices need to rise further in order to allow Barrick and its peers to develop sufficient supply.
For retirees and other conservative investors, having some gold exposure can make sense, and doing so through miners can give you valuable income that bullion investments can't deliver. Gold stocks are risky, but Barrick is among the highest quality in the bunch, and those willing to take on some risk should feel comfortable considering it for 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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