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Will Vodafone 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.

Around the world, telecom companies are huge dividend producers and have also seen impressive growth from the rise of the wireless revolution. Vodafone (NASDAQ: VOD  ) is an interesting play both for its European business as well as its exposure to the U.S. wireless market. Below, we'll revisit how Vodafone 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 Vodafone.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$124 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

1 year

Fail

Stock stability

Beta < 0.9

0.33

Pass

 

Worst loss in past five years no greater than 20%

(42.9%)

Fail

Valuation

Normalized P/E < 18

13.65

Pass

Dividends

Current yield > 2%

5.8%

Pass

 

5-year dividend growth > 10%

7.1%

Fail

 

Streak of dividend increases >= 10 years

13 years

Pass

 

Payout ratio < 75%

83.3%*

Fail

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes. *Based on normalized earnings.

Since we looked at Vodafone last year, the company lost a point, as its payout ratio climbed above the 75% mark. The stock has also struggled, losing about 5% over the past year.

Even with its tepid stock performance, Vodafone's worldwide business has helped it weather the storm in its industry better than some of its European counterparts. In particular, France Telecom (NYSE: ORAN  ) and Telefonica (NYSE: TEF  ) have both had to make dramatic moves to slash their dividends in the wake of poor economic conditions in Europe. Both Telefonica and France Telecom also have substantial operations outside their home markets, yet for Vodafone, its 45% stake in the Verizon Wireless joint venture has produced immense dividends that have helped it avoid the full brunt of the crisis.

One interesting idea that has come up, though, would involve Vodafone potentially giving up its stake in Verizon Wireless. For majority-owner Verizon Communications (NYSE: VZ  ) to buy out Vodafone, it would need to come up with $50 billion to $60 billion in financing to offer both cash and stock in a buyout. For its part, Vodafone is in no hurry to do a deal given the huge portion of the company's overall value that the Verizon Wireless stake represents, but CEO Vittorio Colao said he might be receptive to changes in the deal.

For retirees and other conservative investors, Vodafone represents a reasonable value in a depressed market. With better growth prospects ahead and a solid dividend, retirement investors should feel comfortable looking at Vodafone for telecom exposure in their 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.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report, "3 Stocks That Will Help You Retire Rich," names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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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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