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Will Vodafone Help You Retire Rich?

Tuesday - 3/5/2013, 12:00am  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.

Around the world, telecom companies are huge dividend producers and have also seen impressive growth from the rise of the wireless revolution. Vodafone is an interesting play both for its European business as well as its exposure to the U.S. wireless market. Below, we'll revisit how Vodafone 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 Vodafone.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$124 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

1 year

Fail

Stock stability

Beta < 0.9

0.33

Pass

 

Worst loss in past five years no greater than 20%

(42.9%)

Fail

Valuation

Normalized P/E < 18

13.65

Pass

Dividends

Current yield > 2%

5.8%

Pass

 

5-year dividend growth > 10%

7.1%

Fail

 

Streak of dividend increases >= 10 years

13 years

Pass

 

Payout ratio < 75%

83.3%*

Fail

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes. *Based on normalized earnings.

Since we looked at Vodafone last year, the company lost a point, as its payout ratio climbed above the 75% mark. The stock has also struggled, losing about 5% over the past year.

Even with its tepid stock performance, Vodafone's worldwide business has helped it weather the storm in its industry better than some of its European counterparts. In particular, France Telecom and Telefonica have both had to make dramatic moves to slash their dividends in the wake of poor economic conditions in Europe. Both Telefonica and France Telecom also have substantial operations outside their home markets, yet for Vodafone, its 45% stake in the Verizon Wireless joint venture has produced immense dividends that have helped it avoid the full brunt of the crisis.

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