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Will Nokia Help You Retire Rich?

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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 measurements to show what makes a great retirement-oriented stock.

Rags-to-riches stories get a lot of press, given the wealth they create for investors. But Nokia (NYSE: NOK  ) represents the opposite side of the coin, a true riches-to-rags story featuring a company that once stood atop the entire world mobile-phone market. With the advent of smartphones, however, Nokia has found itself behind the curve, and recent efforts to catch up thus far haven't borne fruit. Can the Finnish giant get to the finish line? Let's take a look at how Nokia 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 Nokia.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $11.4 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 2 years Fail
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.89 Pass
  Worst loss in past five years no greater than 20% (58.8%) Fail
Valuation Normalized P/E < 18 NM NM
Dividends Current yield > 2% 8.5% Pass
  5-year dividend growth > 10% (14.2%) Fail
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% NM NM
       
  Total score   3 out of 8

Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.

With only 3 points, Nokia doesn't give retirees and other conservative investors much of what they like to see in a stock. What appears to be a strong dividend actually results largely from the huge plunge in the company's shares recently, as prospects for the mobile giant have continued to dim.

In the mobile-device business, there've been big winners and big losers, without a whole lot of in-between. Just as former corporate-smartphone leader Research In Motion (Nasdaq: RIMM  ) has fallen out of favor because of its failure to keep up with the pace of innovation elsewhere in the industry, Nokia also came out on the short end of the stick, as it finally lost its global leadership position to Samsung earlier this year. More importantly, while Apple (Nasdaq: AAPL  ) and several manufacturers using the Google Android operating system have rushed in to grab a huge portion of the higher-margin smartphone market, Nokia has languished behind in the high-growth area.

Nokia's partnership with Microsoft (Nasdaq: MSFT  ) was supposed to change all that. But the release of the Lumia didn't go nearly as well as the company had hoped. Now, Nokia is pinning its hopes on its new Lumia phones, which run on Microsoft's new Windows Phone 8 operating system. But even there, Samsung is crashing the party, beating Nokia to the punch with a Windows-OS phone of its own.

For retirees and other conservative investors, Nokia is an incredibly speculative value play right now. On its face, it's extremely inexpensive, with net cash making up more than half its market capitalization. But until the company demonstrates it can survive in a tough industry environment, it's far too risky for most retirement portfolios.

Keep searching
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.

When it comes to smartphones, everyone wants to know what Apple's up to. Find out in The Motley Fool's premium report on Apple, which gives you insight from our top tech analysts along with a year's worth of free updates. Get your copy today.

Add Nokia to My Watchlist, which will aggregate our Foolish analysis on this and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Google, and Microsoft, as well as creating a bull call spread position on Apple and a synthetic covered call position on Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 17, 2012, at 8:45 PM, JaanS wrote:

    Dan - Nice analysis.

    For a look at some technical issues with the Lumia, you may like my foolish post:

    http://beta.fool.com/jaans/2012/09/09/nokia-lumia-shedding-s...

  • Report this Comment On September 17, 2012, at 8:54 PM, JaanS wrote:

    The greater the potential gain - the greater the risk.

    To my mind, the question is whether or not Nokia will pull a comeback - which means a successful smartphone - which depends in large part on WP8. (see my article in other comment for more on this.)

    They certainly have the capacity to build good hardware. The new 920 impressed those who saw it. They also have a name with such deep respect, that I think the snafu re fudged video will be forgiven - as long as they do not do it again. (Personally, I think they should fire the guy responsible.)

    It all comes down to execution. And that remains to be seen. We have to have working models in hand to judge that.

  • Report this Comment On September 18, 2012, at 2:39 AM, llIlllIlllIlllIl wrote:

    For the case of Nokia I disagree with the check-box based table above, as it looks too much into the previous failures rather than the situation going forward.

    Nokia almost ran itself into the ground due to being weighed down by an ageing mobile operating system, the management not progressing with the industry, and a delusional view that China alone could sustain the company. It has addressed all of these and its recent unveiling of the Lumia 920 is testament to this.

    It is now halfway through a turnaround, which is the reason for the fails in the above table.

    Sure it might be viewed as a more risky stock (short term) than some, however as a long term stock there is limited downside risk with enormous potential upside. Remember they still ship about 100,000,000 phones per quarter.

    A good contrast would be RIM, which suffered a similar decline (although a much smaller company - it was nowhere near the world's #1 phone manufacturer), but has no turnaround plan.

  • Report this Comment On September 18, 2012, at 3:17 AM, SUPERMANSTOCKS wrote:

    This article does make good points, and clear ones also. But it also stands by what I have seen time and time again on the Fool. They always take a look at what no one wants to find the Hidden Gems. Nokia is one of those Hidden Gems. I think that when people get scared they tend to run and hide until the smoke clears. Look at Apple for example, this was a company no one wanted, and was at one time broke. I am not saying that Nokia will ever be 600.00 a share. But I could see 40 or 50.00 a share from the recent improvements. Now anyone can do the math and realize the risk and potential. This company right now is like the craps table at the Mirage or MGM in Las Vegas. That is honestly what the entire stock market is. One big 1000lbs Casino and no one likes to lose. But teh facts are facts, you hve to play if you want to win.

  • Report this Comment On September 18, 2012, at 1:46 PM, ramaus wrote:

    Went long NOK five years into retirement. Over the next three years no other stock will do better.

    Go NOK.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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