Recs

4

Will ArcelorMittal 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.

Few things have transformed the global economy as much as steel. With all the uses for the heavy metal that have bolstered infrastructure and construction projects around the world for years, steel has played a vital role in economic growth. At the center of the world steel industry, ArcelorMittal (NYSE: MT  ) has built itself into a huge leader. But with European woes having weighed on the company for years, can ArcelorMittal recover? Below, we'll revisit how ArcelorMittal 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 ArcelorMittal.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $22.5 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 2 years Fail
Stock stability Beta < 0.9 1.48 Fail
  Worst loss in past five years no greater than 20% (68.5%) Fail
Valuation Normalized P/E < 18 10.46 Pass
Dividends Current yield > 2% 5.2% Pass
  5-year dividend growth > 10% (3.6%) Fail
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 182.5% Fail
       
  Total score   3 out of 10

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

Since we looked at ArcelorMittal last year, the company has dropped a point. The stock has seen a similar decline, falling 10% in the past year as the steel industry struggles to support a world with waning growth prospects.

ArcelorMittal is the biggest steelmaker in the world. The company is also vertically integrated, meaning that it owns its own iron ore production facilities. That allows it to bypass third-party iron ore producers such as Cliffs Natural Resources (NYSE: CLF  ) and Vale (NYSE: VALE  ) , giving it a vital edge when iron ore prices are high.

But ArcelorMittal is trading at a big discount to its book value. Overall steel demand is only rising very slowly, and with a potential slowdown looming in China, it's hard to be sure exactly when the industry will recover more quickly. Moreover, unlike U.S.-based Nucor (NYSE: NUE  ) and U.S. Steel (NYSE: X  ) , ArcelorMittal has particularly strong exposure to Europe, where many fear that a recession is imminent.

Analysts are increasingly convinced that things in the steel industry will get worse before they get better. A rash of downgrades hit the industry late last month, with ArcelorMittal failing to escape the carnage. Until earnings can catch up with even modest multiples, steel stocks may struggle to hit bottom.

For retirees and other conservative investors, buying cyclical stocks at the bottom of the cycle is typically a recipe for long-term success. But you have to be comfortable taking a lot of risk. If you're not willing to bet on a turnaround, then you'll want to look beyond ArcelorMittal to find some safe alternatives.

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 ArcelorMittal 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. The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Nucor. 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.


Read/Post Comments (0) | 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.

Be the first one to comment on this article.

DocumentId: 2042575, ~/Articles/ArticleHandler.aspx, 4/20/2014 5:10:01 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated 2 days ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 4:03 PM
MT $16.28 Up +0.07 +0.43%
ArcelorMittal CAPS Rating: ****
CLF $18.65 Down -0.05 -0.27%
Cliffs Natural Res… CAPS Rating: ****
NUE $52.14 Down -0.07 -0.13%
Nucor CAPS Rating: ****
VALE $14.10 Up +0.23 +1.66%
Companhia Vale Ads CAPS Rating: ****
X $27.04 Up +0.13 +0.48%
United States Stee… CAPS Rating: ***

Special Offer for Savvy Investors Like You!

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut semper dui vitae molestie venenatis. Suspendisse.

Enter Email Address:



Privacy / Legal Information
Advertisement