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Will Silver Wheaton Help You Retire Rich?

Wednesday - 12/12/2012, 6:17pm  ET

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.

Silver mining has been a lucrative industry over the past decade, as silver prices have soared. Although Silver Wheaton isn't a silver miner, it has found an even more lucrative way to cash in on rising bullion prices, using its silver streaming model to finance mining companies and claim a share of their output. Over the past year, though, silver prices have been stuck below their all-time-record levels set just a couple years back. Can Silver Wheaton still grow? Below, we'll revisit how Silver Wheaton 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 Silver Wheaton.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$13 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

1.86

Fail

 

Worst loss in past five years no greater than 20%

(61.7%)

Fail

Valuation

Normalized P/E < 18

37.65

Fail

Dividends

Current yield > 2%

0.8%

Fail

 

5-year dividend growth > 10%

NM

NM

 

Streak of dividend increases >= 10 years

0 years

Fail

 

Payout ratio < 75%

23.7%

Pass

       
 

Total score

 

3 out of 9

Source: S&P Capital IQ. NM = not meaningful; Silver Wheaton paid its first dividend in March 2011. Total score = number of passes.

Since we looked at Silver Wheaton last year, the company hasn't been able to improve on its three-point score. But the stock has done reasonably well, climbing about 20% over the past year.

Silver Wheaton has an ingenious business model. Rather than taking on all the risks of mining, the company provides capital to mining businesses. For instance, this year, the company completed a deal with HudBay Minerals to provide $750 million toward its Peruvian Constancia mine, receiving the rights to silver streams from that mine as well as silver and gold production from an existing Manitoban mine. Existing deals with Goldcorp and Barrick Gold have continued to pay off for the streaming company, despite bad news from both companies that could reduce production and have an impact on Silver Wheaton's streams from their mines.

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