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.
With so many big energy companies in the U.S., it's easy to forget that foreign companies play a big role in the industry. But South Africa's Sasol
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 Sasol.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$28.3 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.47||Pass|
|Worst loss in past five years no greater than 20%||(37.2%)||Fail|
|Valuation||Normalized P/E < 18||9.74||Pass|
|Dividends||Current yield > 2%||4.3%||Pass|
|5-year dividend growth > 10%||16.1%||Pass|
|Streak of dividend increases >= 10 years||3 years||Fail|
|Payout ratio < 75%||30.6%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Sasol last year, the company has lost a point. Shares have also performed in lackluster fashion lately, but the energy company has some potential to pull out of its funk in the near future.
Sasol has been involved in the production of synthetic fuels for a long time. But as the shale gas revolution has hit Sasol's home market, it's opened up a new opportunity for the company. Although the company imports most of the natural gas that South Africa uses from Mozambique, the nation's Karoo region could provide substantial gas reserves, although concerns about hydraulic fracturing processes exist.
But concerns about South Africa's political situation could have an impact on Sasol. Some perceive a threat of nationalization of the country's mining assets if certain factions prevail in the African National Congress elections scheduled for later this year. Big gold miners AngloGold Ashanti
For retirees and other conservative investors, Sasol carries a cheap valuation and boasts a strong and growing dividend. The company differs greatly from some other oil-related stocks, but as an international play in a part of the world that many investors ignore, Sasol makes a reasonable candidate for a diversified retirement portfolio.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Sasol. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.