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Will Canadian Pacific Help You Retire Rich?

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.

Rail transportation has re-emerged as a viable, efficient way to transport goods across long distances. Yet many U.S. investors tend to forget that their Canadian neighbors to the north have even more ground to cover. Canadian Pacific (NYSE: CP  ) meets Canada's transportation needs with transcontinental shipping that links the western port of Vancouver to population-rich areas of east-central Canada, ending in Montreal but also offering branches to Chicago, Minneapolis, and New York City. Will Canadian Pacific stand up to the competitive North American railroad market? Below, we'll take a look at how Canadian Pacific 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 Canadian Pacific.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $14.5 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 0 years Fail
Stock stability Beta < 0.9 0.78 Pass
  Worst loss in past five years no greater than 20% (47.7%) Fail
Valuation Normalized P/E < 18 26.32 Fail
Dividends Current yield > 2% 1.7% Fail
  5-year dividend growth > 10% 0.8% Fail
  Streak of dividend increases >= 10 years 3 years Fail
  Payout ratio < 75% 31.1% Pass
       
  Total score   3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With just three points, Canadian Pacific falls short on a number of important traits that conservative investors look for. Yet investors are quite satisfied with the roughly 70% jump in the stock's price over the past year.

For years, Canadian Pacific and its peers languished in relative obscurity. But the commodities boom that came in the mid-2000s really ramped up demand for railroads, especially with the double benefit of high energy costs making it more costly to use alternative shipping methods as well as an almost desperate hunger for resources that traditionally ship via rail.

Yet recently, railroads have faced challenges from threats of a global slowdown. Last week, Norfolk Southern (NYSE: NSC  ) announced reduced earnings guidance, noting the big drop in coal demand that stemmed from Chinese economic road bumps as well as utilities shifting to cheap natural gas. Yet while Norfolk and CSX (NYSE: CSX  ) are heavily exposed to the coal market, Canadian Pacific gets only about 10% of its sales from coal. Canadian Pacific has also had its own unique struggles, though, as a labor dispute caused disruptions during the spring, leading to production problems for CP customer Teck Resources (NYSE: TCK  ) .

Late last year, activist investor Bill Ackman turned his attention to Canadian Pacific, making many shareholders believe that he could turn the company around. Between takeover speculation and other strategic moves, the company has outperformed larger rival Canadian National (NYSE: CNI  ) .

For retirees and other conservative investors, though, the big gain in shares suggests that all the easy money has already been made in Canadian Pacific. A rebound in the world economy could lead to further gains, but at such a high valuation, you'd likely be better off going with a different railroad from Canadian Pacific for your retirement portfolio.

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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Canadian Pacific to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Canadian National Railway. We Fools may not 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.


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Dan Caplinger
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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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