There's never really a bad time to start investing for retirement, and there's nothing like finding some strong value stocks. As you might know, value stocks are fundamentally strong companies with solid growth potential that are trading for less than they're worth -- which means there's also a greater chance they'll outperform the market in the long run and provide rich returns.
Right now, Motley Fool investors believe vehicle auctioneer Copart (CPRT 1.14%), power-and-gas utility Consolidated Edison (ED 0.64%), and pharmaceutical heavyweight Pfizer (PFE -0.19%) are offering excellent entry points for retirees. Here's why.
Copart is copacetic
Rich Smith (Copart): In past roundtables, I've offered up car companies like Ford and General Motors as viable value stocks for investment -- cheap stocks that, assuming things stay the same and the auto industry continues to cycle from highs to lows to highs again, should do fine in the long run. But what if things don't stay the same? What if the entire automotive industry gets disrupted by the arrival of electric vehicles from companies like Tesla?
Image source: Getty Images.
When investing for retirement, the last thing you want to worry about is your entire company being made obsolete due to a change in technology. That's why I'm going to suggest an investment in one company that should do just fine whether Americans are still buying gas guzzlers a few decades from now, or whether they've switched over to the electro-buggies.
What kind of company could survive a change that big? The answer is Copart.
Copart is the kind of company that enters the picture at an automobile's end of life. Running auctions primarily of vehicles salvaged from auto accidents and facilitating their resale to buyers planning to dismantle said vehicles, Copart doesn't really care what kind of fuel those cars and trucks (used to) run on. It's concerned with squeezing the last bit of value out of a dead automobile before it goes to the great junkyard in the sky.
This is a good business to be in and likely to remain so, even if electric cars eventually take over the world. Last quarter, Copart grew its sales 8%, and grew its profits nearly three times as fast. Copart stock sells for only 18.2 times earnings -- which doesn't sound particularly cheap, but really is if Copart can hit the long-term earnings-growth-rate target of 18.6% that Wall Street has set for it. (By the way, last quarter, the company grew earnings 21%.)
That works out to a PEG ratio of less than 1.0 -- and in my view, it makes Copart stock a value stock that's just perfect for retirement.
The only utility Dividend Aristocrat is also trading cheap
Neha Chamaria (Consolidated Edison): A defensive stock is ideally a great choice for retirees, simply because a company in a non-cyclical business is better equipped to generate stable revenues -- and, therefore, shareholder returns in the long run. Electric-and-gas utility Consolidated Edison is a fine example, and the stock's currently trading at a pretty compelling seven times price to cash flow.
Con Ed is a highly regulated business, as it provides electricity and gas to millions of customers primarily in New York City and Westchester County at decoupled rates, or rates aligned with pre-established revenue targets. What that means is that Con Ed's revenues are pretty much known in advance, which explains why the company's profits and cash flows have been northward bound in recent years.
ED Net Income (TTM) data by YCharts.
Of course, Con Ed isn't the kind of company to grow gangbusters, but in retirement, you're better off with a low-volatile, stable business than a high-risk one. And it's not that Con Ed hasn't generated good returns for shareholders -- the stock has gained nearly 64% in the past five years. Much of it has to do with dividends -- Con Ed has increased its dividends for 43 consecutive years, with the stock yielding 3.3% currently. In fact, Con Ed is the only utility to have made it to the coveted Dividend Aristocrat list.
With Con Ed now also tapping non-utility income streams and renewable-energy opportunities, I expect its top and bottom lines to grow at a faster clip in coming years. Con Ed's potential growth, combined with dividends, should make it a perfect retirement stock.
This Big Pharma provides multiple layers of value
George Budwell (Pfizer): Value can come in many forms. The pharma titan Pfizer, for instance, offers investors a top-notch clinical pipeline that sports 96 total compounds and possible line extensions, a mountain of cash reserves, and one of the best dividend programs within its peer group. For retirees, though, the big-ticket item is the sheer diversity of Pfizer's revenue stream.
Unlike many big pharmas and blue-chip biotechs that derive half, or even more, of their total revenues from a single flagship product, Pfizer's immense product portfolio basically ensures that its risk stemming from patent headwinds and/or new competitive threats is far less than the industry average. In the first quarter of 2017, for instance, Pfizer didn't have a single product that made up more than 9.9% of its total sales.
Although the one particular drug -- the pain medicine Lyrica -- that composed 9.9% of the drugmaker's sales in Q1 is facing its own patent cliff, Pfizer's trio of novel cancer drugs -- Bavencio, Ibrance, and Xtandi -- should keep its top line moving in the right direction going forward. In other words, Pfizer's "strength-in-numbers" strategy is proving to be an efficient remedy against the never-ending battle with generic competition.
On the dividend side of the equation, Pfizer's yield of 3.85% is close to the top within its immediate peer group. While the drugmaker's 12-month trailing payout ratio of 102% might be a tad worrisome, Pfizer has ample free cash flows -- over $15 billion -- and cash reserves -- $14.7 billion -- to more than cover its dividend in the years to come. Simply put, a dividend reduction is a highly unlikely scenario in the near term, despite the company's elevated payout ratio.
All in all, Pfizer is a stock that offers several layers of value, making it a great pick for retirees.
