Is Linn Energy a Stock for the Long Term?

Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50 and 59 said they had, on average, about $29,000 saved up. With pensions pretty much gone and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you have to get involved in the stock market to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.

Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:

1. Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this point matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
2. Dividends: Most retirees need a combination of both growth and income, since they'll be depending more and more on their portfolios to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proved that they outperform non-paying dividend companies over long periods of time.
3. Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
4. Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the market's gyrations.

Although some companies' stocks are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid-, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.

How does Linn Energy stack up?
To check out the valuation of Linn Energy (Nasdaq: LINE), we can't look only at its P/E ratio, because it's hard to draw context for a company that has no current P/E. However, the lack of a P/E in itself tells us something isn't quite right, since it's usually a sign that the company had negative earnings that year. Normally, we'd look at the historical five-year average P/E and compare it with the current one, but since we don't have one, that action is rather fruitless.

Linn Energy's dividend is 6.65%. That's tremendous: Not only does the company pay a dividend, but it also pays more than the average company in the S&P 500. Since Linn is set up as an LLC, it has a different tax structure, which, similar to a master limited partnership, allows for higher cash payouts.

Next, we want to ensure that Linn Energy's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past to try to ensure future earnings growth. Over the past five years, Linn Energy has grown its net income by 15.2%. It's been able to grow earnings over the past five years, and that's pretty significant considering all of the market turmoil during that period. Of course, there's no guarantee that growth will continue, but the recent trend is a great sign that the company can prosper in the face of difficulty.

One of the best measurements of volatility is called beta, which measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Linn Energy will move in tandem with the market, a beta of 2.0 means it will move up twice as much as the general market, and so on. Linn Energy has a beta of 0.748, which is pretty low. Generally speaking, I like to see a beta below 1.2 for retirees. In this case, Linn Energy fits the bill.

The competition
We've taken a look at Linn Energy , and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it to understand that particular company. Here are Linn Energy's stats when compared with three of its closest competitors.

Source: Capital IQ, a division of Standard & Poor's.

Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just Linn Energy in isolation.

Of course, I can't decide for you whether this is the best stock for retirement, but it has passed three of the four tests, which is pretty impressive. That doesn't necessarily mean this stock is a slam-dunk, but it has shown its ability to reward shareholders, and that means it could have a place in your portfolio.

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