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.
U.S. investors are very familiar with domestic energy giants, but foreign names often elude the mainstream consciousness. But Statoil (NYSE: STO ) is a name that investors around the world need to get to know, as it is increasingly extending its reach around the globe to cash in on some of the most promising recent energy finds. With plenty of opportunities, will Statoil stay focused enough to profit from them -- or will it make a fatal misstep? Below, we'll revisit how Statoil 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 Statoil.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$81.5 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.60||Pass|
|Worst loss in past five years no greater than 20%||(45.1%)||Fail|
|Valuation||Normalized P/E < 18||4.06||Pass|
|Dividends||Current yield > 2%||4.4%||Pass|
|5-year dividend growth > 10%||10.2%||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||25.2%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Statoil last year, the energy company has kept its seven-point score. But it has made some smart moves that could help it keep improving in the future.
Norwegian-based Statoil has plenty of experience drilling on its home turf in the North Sea. That's been a fruitful area lately, as the company found a new oil reserve there that should reinvigorate what many had believed to be a played-out field. Although it will share another find in the Barents Sea with Eni (NYSE: E ) , the two finds represent unexpected boondoggles for Statoil.
But Statoil isn't content to stay close to home. With Arctic drilling set to play an increasingly important role in the world energy market, Statoil penned an agreement with Chevron (NYSE: CVX ) earlier this year to explore in Canada's Beaufort Sea. Moreover, Statoil is also trying to extend its reach to Brazil through a possible deal with Petrobras (NYSE: PBR ) , and became one of the biggest players in the Bakken shale play when it bought out Brigham Exploration last year. Add in the Gulf of Mexico leases it holds with partner ExxonMobil (NYSE: XOM ) and some promising properties off the coast of Angola, and you quickly realize just how big an operation Statoil is.
For retirees and other conservative investors, Statoil's healthy dividend payouts and ridiculously cheap valuations are amazingly attractive. Although oil companies will never be free of the risk of volatility, Statoil is in a good position to deal with whatever the oil market throws its way in the coming years.
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.
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