Is Total the Right Stock to Retire With?
Nov 8th 2011 10:04AM
Updated Nov 8th 2011 10:14AM
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.
Energy prices have reined in by a small amount in recent months as many question the sustainability of the slow economic expansion we've seen since the financial crisis. But near the epicenter of the European crisis, French oil giant Total (NYS: TOT) has long enjoyed the same success as its U.S. counterparts across the pond. Is Europe a trap for Total shareholders, or will the company shine in the long run? Below, we'll look at how the company 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 Total.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$114.4 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||0.54||Pass|
|Worst loss in past five years no greater than 20%||(31.3%)||Fail|
|Valuation||Normalized P/E < 18||5.15||Pass|
|Dividends||Current yield > 2%||6.2%||Pass|
|5-year dividend growth > 10%||10.4%||Pass|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||53.3%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, Total gives conservative investors some but definitely not all of what they like to see in a stock. Volatility in energy prices and the overall negative environment in Europe have sent shares on a wild ride in recent years, but a substantially growing dividend in recent years should give shareholders some confidence.
With more than $200 billion in revenue over the past 12 months, Total fully deserves its membership among the world's oil giants. But Total hasn't seen the price appreciation that peers including Chevron (NYS: CVX) , ExxonMobil, and even fellow European Statoil (NYS: STO) have experienced -- despite having similar production numbers.
Being in Europe has posed some problems for Total. The company's biggest challenge lately is the disruption of its Libyan operations when uprisings began earlier this year. With the recent death of Muammar Qaddafi, Total can hope that it will restore full operations in Libya soon, although it will undoubtedly take some time.
Despite its European base, Total has operations around the world. Its joint venture with Chesapeake Energy (NYS: CHK) gives it a presence in the Barnett shale play of northern Texas. With increased shale activity in Argentina, Total has staked its claim there, along with rivals including Petrobras (NYS: PBR) and Apache (NYS: APA) . And going beyond oil and gas, Total recently made a sizable investment in SunPower (NAS: SPWRA) , taking advantage of ridiculously cheap share prices to tap into what could be the primary energy source of the future.
For retirees and other conservative investors, the yield over 6% that Total currently enjoys is definitely a drawing point. Moreover, bargain-hunters are getting a good deal on the oil company. Although the ups and downs of energy prices have caused revenue and free cash flow to jump around, Total still deserves a close look for those who need oil and gas exposure in 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.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Statoil, Petroleo Brasileiro, Chevron, Chesapeake Energy, and Total. 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.
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