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.
What We Want to See
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.
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.
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