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.
Among big oil stocks, Occidental Petroleum (NYS: OXY) doesn't have quite the same name recognition as some of its larger peers. Yet the company has a huge oil and gas operation that includes exploration and production as well as midstream distribution and marketing activities. In addition, the company has an extensive chemical segment that brings some diversity to its business. Will the company become more of a household name in the future -- or will it just keep focusing on doing business its way? Below, we'll revisit how Occidental Petroleum 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 Occidental Petroleum.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$65.8 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||4 years||Pass|
|Stock stability||Beta < 0.9||1.16||Fail|
|Worst loss in past five years no greater than 20%||(20.7%)||Fail|
|Valuation||Normalized P/E < 18||9.54||Pass|
|Dividends||Current yield > 2%||2.7%||Pass|
|5-year dividend growth > 10%||18%||Pass|
|Streak of dividend increases >= 10 years||10 years||Pass|
|Payout ratio < 75%||22.1%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Occidental Petroleum last year, the company has made huge strides forward, gaining three points. Yet despite reaching the 10-year mark in annual dividend increases and improving its dividend yield and free cash flow growth, the stock hasn't performed very well in the past year, dropping about 20%.
Occidental has an unusual approach that makes it stand out from some of its peers. Unlike Chesapeake Energy (NYS: CHK) , which tends to jump on all of the numerous opportunities it has, Occidental doesn't try to exploit all of its resources at once. Instead, Occidental focuses most of its efforts on particular areas. For instance, in 2011, the company committed about $1.6 billion in capital expenditures on its shale holdings in California, despite having other lucrative properties in the Bakken region of North Dakota as well as the Permian Basin.
But the company is still vulnerable to changing attitudes about unconventional gas production. In Kansas, Occidental is part of a group of four companies that control 35% of the state's production of natural gas. Yet as entrants SandRidge Energy (NYS: SD) , Chesapeake, and Royal Dutch Shell (NYS: RDS.A) start grabbing up stakes in a potential hydraulic fracturing area, any backlash that may result from their fracking efforts may adversely affect Occidental as well.
More recently, oil's drop to about $90 per barrel has hurt a number of oil stocks, including Occidental. If that decline continues, it could spell an end to the consistent growth that Occidental and many of its peers have enjoyed.
For retirees and other conservative investors, though, Occidental has a better record than many of rewarding shareholders through increasing dividends. With a relatively low payout ratio, Occidental could see some profit slowdowns without jeopardizing its dividend. Those looking for energy exposure in their retirement portfolios should take a close look at Occidental.
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. The Motley Fool owns shares of Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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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