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.
Most people think that the biggest business opportunities happen in big cities. But often, the juiciest profits come from going where other businesses fear to tread. That's been the case for the rural telecom industry, where Windstream
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 Windstream.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$6.4 billion||Fail|
|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||0.86||Pass|
|Worst loss in past five years no greater than 20%||(22.7%)||Fail|
|Valuation||Normalized P/E < 18||24.38||Fail|
|Dividends||Current yield > 2%||9.1%||Pass|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||333.2%||Fail|
|Total score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Windstream last year, the company has dropped a point. Even with the shares down more than 10% in the past year, a drop in normalized earnings has pushed the company's valuation up substantially.
Windstream is likely best known among investors for its dividend. Like rivals Frontier Communications
Yet the entire industry has faced headwinds. Frontier, for instance, has seen its shares plunge as the company had to cut its dividend due to customers getting rid of landlines in favor of competitors' wireless service. Fool analyst Brenton Flynn thinks that the entire sector is a dividend trap waiting to spring on unsuspecting investors, and while Windstream hasn't had to cut its payout, many think it's only a matter of time. Moreover, despite Windstream having arrangements with satellite providers DISH Network and DIRECTV, it still has to contend with AT&T
In its most recent quarter, Windstream really surprised investors. Although revenue rose by almost half from the year-ago quarter, profits shrank by almost the same amount. Costs related to the merger and integration of PAETEC were responsible for the drop, but the impact those costs have had on free cash flow raise questions about whether Windstream can sustain its dividend.
For retirees and other conservative investors, a 9% dividend yield looks attractive -- unless there's a risk that it'll go away. Often, though, high-yield stocks have big payouts for a reason, and here, only those investors who believe that Windstream has a big competitive advantage over its peers should make the stock part of their retirement portfolios.
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.
Windstream hasn't suffered like Frontier, but the two telecoms have a lot in common. Get the scoop on the entire industry in the Fool's premium report on Frontier Communications. With an analysis of the pros and cons of the rural telecom business in general, Windstream investors will get some valuable information out of the report as well. You owe it to yourself to click here and read it today.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.