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Will Spectra Energy 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 measures to show what makes a great retirement-oriented stock.

Natural gas has gone from being a flared-off byproduct of oil production to becoming the next big thing in energy. With huge production gains, the challenge lately has been to transport gas to market. Spectra Energy (NYSE: SE  ) has an extensive pipeline network for transmission and distribution of that gas from production to final customers use. How will the rebound in nat-gas prices affect the company? Below, we'll revisit how Spectra Energy 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 Spectra Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$18 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

1 year

Fail

Stock stability

Beta < 0.9

0.94

Fail

 

Worst loss in past five years no greater than 20%

(36.3%)

Fail

Valuation

Normalized P/E < 18

20.93

Fail

Dividends

Current yield > 2%

4.5%

Pass

 

5-year dividend growth > 10%

11.2%

Pass

 

Streak of dividend increases >= 10 years

2 years

Fail

 

Payout ratio < 75%

72.6%

Pass

       
 

Total score

 

4 out of 10

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

Since we looked at Spectra Energy last year, the company's score has dropped by a point, with a drop in revenue and a boost in valuation counting against Spectra. The stock has also been stuck in the doldrums, with share prices falling more than 10% over the past year.

The natural gas boom has created a lot of winners on the exploration and production side of the business, with new finds making investors in small companies rich. But it has also presented plenty of opportunities to Spectra to extend its existing pipeline network to encompass new discoveries. For instance, in Ohio's Utica Shale, Spectra entered into a joint venture with Enbridge (NYSE: ENB  ) and DTE Energy (NYSE: DTE  ) to build a pipeline from northeastern Ohio to Michigan and Ontario, opening up new markets for the shale gas produced there.

But Spectra is going beyond simply passively collecting and moving natural gas. Its joint venture with Phillips 66 (NYSE: PSX  ) owns the general partnership interest in DCP Midstream Partners (NYSE: DPM  ) , which is the largest U.S. producer of natural gas liquids. With liquids having gained in popularity because of their higher prices compared to dry gas, DCP gives Spectra a valuable niche in the midstream industry.

For retirees and other conservative investors, the fact that Spectra's profits dropped 30% in its most recent quarter due to lower prices for energy products is somewhat concerning. But longer term, the company is setting the stage for some impressive gains if energy prices start to rebound. For retirement investors willing to make such a long-term bet on energy, Spectra's healthy dividend is worth a closer look despite its somewhat lofty valuation and weak growth recently.

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.

Retirees deserve a chance at some top stocks, and we've got a good candidate for you. Find out which stock the Motley Fool's chief investment officer has selected for his No. 1 stock for the next year in our new free report, "The Motley Fool's Top Stock for 2013." Grab your copy now while it's still available; just click here and it's yours.

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


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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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