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Will Verizon 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.

Verizon (NYSE: VZ  ) has cashed in on the huge potential in the wireless telecom business, building an extensive U.S. network that creates huge amounts of cash flow from an increasing base of customers buying data-intensive smartphones. Yet as the No. 2 telecom in the Dow Jones Industrials (DJINDICES: ^DJI  ) , Verizon has a chip on its shoulder when it comes to dealing with its archrival. Below, we'll revisit how Verizon 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 Verizon.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$130 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

4 years

Pass

Stock stability

Beta < 0.9

0.44

Pass

 

Worst loss in past five years no greater than 20%

(18.1%)

Pass

Valuation

Normalized P/E < 18

147.88

Fail

Dividends

Current yield > 2%

4.5%

Pass

 

Five-year dividend growth > 10%

4%

Fail

 

Streak of dividend increases >= 10 years

8 years

Fail

 

Payout ratio < 75%

597.7%

Fail

       
 

Total score

 

6 out of 10

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

Since we looked at Verizon last year, the company has lost a point, as a drop in earnings led to a soaring multiple. Yet the stock hasn't reflected any disappointment with those numbers, having risen nearly 20% over the past year.

Verizon has been in an enviable position lately, as smartphone growth has vaulted it from being dependent on a dying landline business to looking for new opportunities to expand and profit from its wireless network. Even though AT&T (NYSE: T  ) remains an obviously huge competitor in the space, both companies have captured millions of new customers with subsidized phone purchases that create upfront pressure on profits yet lock in lucrative two-year contracts and prevent customers from seeking out cheaper alternatives. Changes to data offerings to encourage device-sharing and all-family plans could prove to be an even bigger moneymaker for Verizon.

Of course, huge change is always happening in the industry. The recent capital infusion that Sprint received promises to affect both Verizon and AT&T, making it less likely that the pair will end up as a duopoly in the U.S. market.

Yet despite the risks involved, Verizon is considering a huge step toward concentrating its growth bets on its U.S. wireless network. Despite the massive amounts of money involved, Verizon reportedly wants to buy out Vodafone's (NASDAQ: VOD  ) 45% stake in their Verizon Wireless joint venture. Given how important the venture has been to Vodafone, Verizon won't be able to get the valuable asset cheaply.

For retirees and other conservative investors, the huge amount of leverage involved in taking full control of Verizon Wireless would make Verizon a much riskier play, albeit with higher return potential. Yet with Verizon's cash flow potentially allowing it to finance a buyout without hurting its dividend, retirement investors should nevertheless consider the company for telecom exposure.

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.

Verizon has a great yield, but is it the best dividend stock in the Dow? Find out which stocks we like best by reading the Fool's special report: "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so just click here and get your copy today.

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


Read/Post Comments (1) | 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.

  • Report this Comment On February 25, 2013, at 5:39 PM, crackdclaw wrote:

    <i>the company has lost a point, as a drop in earnings led to a soaring multiple.</i>

    That's the research I would be willing to read, not a fluff piece scoring a stock on 10 items. Why has the PE gone from the 40's to the 140's. I suspect it's more than a drop in earnings.

    As you note in the artice, Verizon's largest revenue stream is from their wireless business. Yet they own only 55% of the business and I believe Vodaphone owns the balance. I had thought Verizon pays a dividend to Vodaphone based on their share of ownership. I've not researched VZ extensively, but I don't think the PE jumped from 40 to close 140 due to an earnings drop. I suspect it's the timing of when they pay a dividend to Vodaphone. VZ's PE the past 5 years has yoyo'd between 40 and 140. There's more to the story than saying it's a drop in earnings, but that would take research, and not simply filling in checks on a scorecard.

    Yes, PE rises when earnings drop. How about telling why VZ's earnings dropped so significantly as to quadruple the PE ratio. Again, I've not research this but a quick glance has me believing the next quarter will show a PE of 40 not 140 as it currently shows.

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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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8/21/2014 4:31 PM
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