Will Murphy Oil 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.

Murphy Oil (MUR 0.54%) may not be the best-known oil company out there, but as a newly focused exploration and production company, Murphy has plenty of potential. The environment for energy stocks cooled off this year, though, as prices stopped their steady climb and headed lower. Are the best times over for the company? Below, we'll revisit how Murphy Oil 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 Murphy Oil.

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

Since we looked at Murphy Oil last year, the company has kept its seven-point score. But the stock hasn't gone much of anywhere, finishing roughly unchanged over the past year.

2012 marked another stage in Murphy Oil's quest toward becoming solely an exploration and production company. Having sold off its refineries to Valero (VLO 0.10%) and Calumet Specialty Products (CLMT -0.90%) late last year, Murphy joined a craze that saw many integrated oil players split off or sell their refinery assets. Yet even after the sales, Murphy retained some refining and other downstream assets.

Third Point hedge fund manager and activist investor Dan Loeb's decision to acquire a big stake in the oil company, however, arguably prompted Murphy to take further action. Following the same route that ConocoPhillips (COP 0.60%) did with Phillips 66 (PSX -0.03%), Murphy said last month that it would spin off its remaining refining and distribution segment, leaving it to focus entirely on exploration and production. Shares soared in response, especially as the announcement also came with news of a $2.50 per share special dividend and a $1 billion share buyback program.

One reason for doing the spinoff now is to free up capital to expand Murphy's exploration program. Right now, the company has already developed most of its proven resources, and Murphy therefore needs to look at ways to buy more undeveloped land with promising mineral prospects.

For retirees and other conservative investors, 2013 will mark a big moment in Murphy's history. How it performs as an E&P company this year and next will define its future for a long time. Retirement investors who are willing to take on the risk that involves could be rewarded handsomely.

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.

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