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.

Utilities have traditionally been among the safest stocks in the market, and considering their lucrative dividends, income-seeking investors have sought them out for their reliable payouts. Yet PPL has faced some challenges over the past year. Is it still a smart buy for retirement investors? Below, we'll revisit how PPL 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 PPL.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$16.8 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

5 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.39

Pass

 

Worst loss in past five years no greater than 20%

(39.1%)

Fail

Valuation

Normalized P/E < 18

11.52

Pass

Dividends

Current yield > 2%

5%

Pass

 

5-year dividend growth > 10%

3.7%

Fail

 

Streak of dividend increases >= 10 years

11 years

Pass

 

Payout ratio < 75%

51%

Pass

       
 

Total score

 

7 out of 10

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

Since we looked at PPL last year, the company has picked up a point as its dividend-raising streak crossed the decade mark. But the stock hasn't shared those gains, posting a small decline in share price over the past year.

PPL has a wider range of utility services than its namesake Pennsylvania Power & Light would suggest. In addition to its Pennsylvania delivery and generation facilities, PPL serves customers in Kentucky, Virginia, Tennessee, Montana, and the United Kingdom.

Still, Pennsylvania is a key part of the company's business, and like many other utilities in the region, PPL suffered greatly from Hurricane Sandy, which it called the most devastating storm in its history. With half a million customers losing power, the company didn't fare as badly as Consolidated Edison or FirstEnergy's Jersey Central Power & Light division, but the storm has still led analysts to knock a few cents off their earnings projections for the fourth quarter.

For the most part, though, PPL has rewarded investors with above-average dividends. Although Exelon has been able to produce a massive yield of 7%, thanks in large part to its plunging share price over the past year, PPL tops a number of its peers, most notably Duke Energy which recently expanded its business by finalizing its merger with Progress Energy earlier this year.

For retirees and other conservative investors, PPL's relatively high debt levels are a significant concern. But with leverage levels relatively high throughout the utility industry, PPL's valuation is attractive enough to make income-seeking investors want to take a second look at the utility as a potential addition to a 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 improve your investing skills and teach you how to separate the right stocks from the risky ones.

As promising a yield as PPL has, Exelon is perfectly positioned to capitalize from energy demand growth with the largest nuclear fleet in North America. Along with its renewable energy focus and a recent merger, Exelon and its best-in-class dividend look extremely promising. To determine whether Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.

Add PPL to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon. 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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