Is General Electric the Right Stock to Retire With?

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. Let's figure out what makes a great retirement-oriented stock, then examine whether General Electric (NYSE: GE  ) has what we're looking for.

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.
  • 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 General Electric.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $227 billion Pass
Consistency Revenue growth > 0% in at least four of past five 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 1.66 Fail
  Worst loss in past five years no greater than 20% (53.9%) Fail
Valuation Normalized P/E < 18 25.65 Fail
Dividends Current yield > 2% 2.6% Pass
  5-year dividend growth > 10% (12.8%) Fail
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 43.0% Pass
       
  Total score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Despite its strong reputation, General Electric scores just three points. The weak showing highlights just how big a disappointment GE has been to conservative investors in recent years.

For decades, GE was known primarily as an industrial powerhouse. Even now, its leadership in renewable energy has given it great future growth opportunities. Having stood its ground against giant Siemens (NYSE: SI  ) and tiny A-Power Energy Generation Systems (Nasdaq: APWR  ) in the wind turbine space, GE is now threatening First Solar (Nasdaq: FSLR  ) and other solar energy producers as GE steps up with its own thin film modules.

Where GE went astray was with its financing arm. During the boom years of the mid-2000s, the company's revenue from finance-related operations rose from 16% of total revenue in 2000 to 38% in 2007. For several years, the division had the highest operating profits of any within the company. As a result, the stock rose strongly during the bull market from 2003 to 2007, but it made the stock a lot riskier. That risk came home to roost in the financial crisis, as GE suffered huge stock losses and slashed its dividend.

GE has rebounded recently, and it's entirely possible that its future will be as bright as its long history has been. But shell-shocked shareholders might be loath to count on GE having learned its lesson from the market meltdown. Until GE proves itself again, conservative investors may be more comfortable looking elsewhere for their low-risk stock portfolios.

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.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. First Solar is a Motley Fool Rule Breakers selection. 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 Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2011, at 9:54 AM, rolpres wrote:

    GE is politically well connected, at least with the current administration. Should this not bode well for its prospects?

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