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.

As the company with the biggest market capitalization in the Dow Jones Industrials by a wide margin, ExxonMobil has a commanding presence over the oil industry and the entire U.S. stock market. But despite its size, Exxon can't change a basic rule of the energy industry: Once you take oil out of the ground, it becomes increasingly difficult to get as much production from the same wells. Can the oil giant get over declining production trends by capitalizing on new opportunities? Below, we'll revisit how ExxonMobil 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 ExxonMobil.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$397 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

0.51

Pass

 

Worst loss in past five years no greater than 20%

(13.1%)

Pass

Valuation

Normalized P/E < 18

8.80

Pass

Dividends

Current yield > 2%

2.6%

Pass

 

Five-year dividend growth > 10%

9.7%

Fail

 

Streak of dividend increases >= 10 years

30 years

Pass

 

Payout ratio < 75%

22%

Pass

       
 

Total score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at ExxonMobil last year, the company has given back the point it gained from 2011 to 2012, as its free cash flow contracted last year. The stock has only managed to pick up about 5% in the past year as pressure in the energy industry has affected Exxon harder than you might expect.

In its most recent quarter, Exxon managed to resume its growing ways, with profit rising 6%. But Exxon has suffered from production decreases that put the oil giant at a three-year low, lagging behind Chevron's modest production growth in the same quarter.

Part of that disparity has to do with the depths -- literally -- to which Chevron has been willing to go to find new plays. With a huge number of offshore deepwater oil finds in recent years, Chevron has braved the deeps to get them producing. Exxon likely needs to become a bigger player in the deepwater drilling space in order to get production moving back in the right direction.

Also, Exxon has had to defend its decision to remain an integrated oil company rather than spinning off portions of its business. Once they were set free from their exploration-and-production-focused parents, refinery companies Phillips 66 and Marathon Petroleum both soared in value, taking full advantage of extraordinarily high spreads for refined products to maximize profits. Yet recently, Exxon's retention of its downstream segment helped it overcome losses from its E&P activities. In some ways, remaining integrated keeps Exxon more stable than it would be if separated into component parts.

For retirees and other conservative investors, ExxonMobil has a solid dividend and a valuation that's hard to argue with. Yet you have to be comfortable with the fact that the company has at least some prospects for growth if you want to justify adding Exxon to your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help you improve your investing skills and teach you how to separate the right stocks from the risky ones.

Learn to protect your portfolio
Are you at ease...or nervous? It's been a great five-year run for investors, with the Dow and S&P at or near all-time highs. Yet fears abound. When will the next downturn hit? Will political gridlock lead to portfolio-killing inflation? To learn how to protect your portfolio, click here for free guidance from the Motley Fool Pro Academy!

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The article Will ExxonMobil Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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