Recs

8

Will Chevron 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.

They say that being No. 2 makes you try harder, and if that's the case, then Chevron (NYSE: CVX  ) is the hardest-working company in the oil business. With its higher share price, Chevron has a bigger weighting among the Dow Jones Industrials (DJINDICES: ^DJI  ) than its larger rival ExxonMobil (NYSE: XOM  ) , and lately the company has been making every effort to grow even in the face of challenging conditions in the energy markets. Below, we'll revisit how Chevron 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 Chevron.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$227 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

3 years

Fail

Stock stability

Beta < 0.9

0.78

Pass

 

Worst loss in past five years no greater than 20%

(18.3%)

Pass

Valuation

Normalized P/E < 18

7.91

Pass

Dividends

Current yield > 2%

3.1%

Pass

 

Five-year dividend growth > 10%

9.2%

Fail

 

Streak of dividend increases >= 10 years

25 years

Pass

 

Payout ratio < 75%

27%

Pass

       
 

Total score

 

7 out of 10

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

Since we looked at Chevron last year, the company has dropped a point for the second year in a row, with falling revenue leading to the decline. The stock has managed to do a little better, picking up about 5% over the past year.

Chevron has had a rough year, facing the twin headwinds of challenges in maintaining production levels and lower prices for both oil and natural gas. Moreover, with legal issues in Brazil and Ecuador resulting from environmental damage, Chevron has found itself on the defensive in its international operations.

But Chevron is doing its best to grow. It took advantage of Chesapeake Energy's (NYSE: CHK  ) need to raise cash by spending $3.3 billion to buy nearly all of Chesapeake's assets in the Permian Basin. It's even working closely with ExxonMobil to develop an Australian liquefied-natural-gas project that could supply China and the rest of Asia with gas later this decade.

More recently, Chevron's growth attempts have begun to pay off. In its most recent quarter, the company reported rising production levels both in the U.S. and abroad in net oil-equivalent terms, with international nat-gas production and domestic liquids production leading the way.

For retirees and other conservative investors, it's hard to argue with the rock-bottom valuation that Chevron sports right now. With the company having recently reached the 25-year dividend increase milestone to become a Dividend Aristocrat, Chevron looks more attractive than ever as a core energy stock for 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.

Chevron may have taken advantage of Chesapeake's need, but don't count Chesapeake out yet. You can learn more about Chesapeake and its enormous potential by accepting this invitation to read The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

Add Chevron 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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Related Tickers

10/23/2014 1:12 PM
^DJI $16713.77 Up +252.45 +1.53%
DOW JONES INDUSTRI… CAPS Rating: No stars
CVX $116.53 Up +2.53 +2.22%
Chevron CAPS Rating: *****
CHK $21.89 Up +0.32 +1.48%
Chesapeake Energy CAPS Rating: ****
XOM $94.65 Up +1.52 +1.63%
ExxonMobil Corp CAPS Rating: ****

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