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 most people think of stocks for retirement, mining companies aren't typically first on the list, given their volatility. But as the past 10 years have shown us, that may be a mistake, as Pan American Silver (Nasdaq: PAAS ) has taken advantage of big spikes in precious metals prices to build its sales and deliver handsome long-term profits to shareholders. But that's changed in the past year, with the company having had its share price cut almost in half. Will Pan American emerge stronger from the experience, or will the silver miner crash and burn? Below, we'll take a look at how Pan American Silver 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 Pan American Silver.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$2.9 billion||Fail|
|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||1.35||Fail|
|Worst loss in past five years no greater than 20%||(51.7%)||Fail|
|Valuation||Normalized P/E < 18||9.50||Pass|
|Dividends||Current yield > 2%||1.1%||Fail|
|5-year dividend growth > 10%||32.0%*||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||6.2%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes. * 2.5-year growth rate.
With only four points, Pan American Silver doesn't deliver everything that most conservative investors would like to see in a stock. Despite its poor stock performance, though, the miner has some promising things going for it that could boost its results in the future.
The entire silver mining industry has gone through tough times lately. Since silver hit highs around $50 per ounce early last year, bullion prices have plunged, sending the iShares Silver Trust (NYSE: SLV ) down as much as 45% from its highs last year. That exerted pressure on players throughout the industry, with Silver Wheaton (NYSE: SLW ) earning less income from its share of streamed silver from its partners, and Hecla Mining (NYSE: HL ) seeing both revenue pressure as well as problems related to business execution.
Pan American, though, has faced unique challenges. The Argentine government is seeking to impose legislative restrictions on its Navidad mine that would make the project economically infeasible. Although Yamana Gold (NYSE: AUY ) took advantage of a similar situation in buying Extorre Gold and its Argentine Cerro Moro project, many fear that the political climate could lead to nationalization and bring big losses to asset holders like Pan American. It also walked away from its La Preciosa joint venture, with similar concerns about potential profitability.
Looking forward, Pan American still has several promising developments to explore. Between its Dolores, Waterloo, and La Colorada projects, the miner has plenty of potential for future growth.
For retirees and other conservative investors, though, Pan American is still a speculative play. At current share levels, it's one that potentially could be very profitable. But, in order to consider adding the stock to your retirement portfolio, you must have the stomach to endure further drops if silver prices weaken.
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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