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.
Terra Nitrogen Company, L.P. (NYSE:TNH) has been one of the hottest players in the fertilizer industry lately, thanks to the big competitive advantage that its nitrogen-based fertilizers have over costlier alternatives. But with natural-gas prices finally starting to rise a bit, can Terra Nitrogen keep the good times rolling? Let’s revisit how Terra Nitrogen 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:
1). 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.
2). 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.
3). 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.
4). 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.
5). 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 Terra Nitrogen.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $4.5 billion | Fail |
| Consistency | Revenue growth > 0% in at least four of five past years | 3 years | Fail |
| Free cash flow growth > 0% in at least four of past five years | 3 years | Fail | |
| Stock stability | Beta < 0.9 | 0.78 | Pass |
| Worst loss in past five years no greater than 20% | (28.7%) | Fail | |
| Valuation | Normalized P/E < 18 | 43.37 | Fail |
| Dividends | Current yield > 2% | 6.8% | Pass |
| 5-year dividend growth > 10% | 17.2% | Pass | |
| Streak of dividend increases >= 10 years | 2 years | Fail | |
| Payout ratio < 75% | 102.3% | Fail | |
| Total score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Terra Nitrogen last year, the company has lost a point, with a big jump in its normalized earnings multiple. That expansion has led to only minimal share-price gains of around 15% over the past year.
From a fundamental standpoint, Terra Nitrogen really couldn’t have asked for a better year than 2012. With warm winter weather, the company benefited from farmers starting to plant crops early, and the resulting jump in domestic fertilizer use combined with strong emerging-market demand goosed revenue substantially.
Yet arguably, the biggest tailwind for Terra came from low natural-gas prices. Natural gas provides the nitrogen that eventually gets incorporated into Terra’s fertilizers, so low input costs mean higher margins for nitrogen-based fertilizer. By contrast, Mosaic Co (NYSE:MOS) and Potash Corp./Saskatchewan (USA) (NYSE:POT) both suffered from tighter margins as mining costs for potash rose, making them less competitive.
For those who like big dividends, Terra and fellow master limited partnerships Rentech Nitrogen Partners LP (NYSE:RNF) and CVR Partners LP (NYSE:UAN) promise hefty yields for their unitholders. Some may point to high payout ratios for fertilizer MLPs as potentially putting a lid on future distributions, but at least for now, Terra is in the best shape from an earnings standpoint to cover the money it pays to its investors.
For retirees and other conservative investors, Terra Nitrogen is an obvious way to invest for the demographic trend toward higher food demand around the world. Although the shares look pricey on a normalized basis, they trade off their all-time highs, possibly providing a good entry point for retirement investors seeking to add agricultural exposure to their portfolios.
The article Will Terra Nitrogen Help You Retire Rich? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned.
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