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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 Mosaic (NYSE: MOS ) 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 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 Mosaic.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$21.1 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||4 years||Pass|
|Stock stability||Beta < 0.9||1.31||Fail|
|Worst loss in past five years no greater than 20%||(63.3%)||Fail|
|Valuation||Normalized P/E < 18||11.56||Pass|
|Dividends||Current yield > 2%||0.4%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||3.3%||Pass|
|Total score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, Mosaic gives conservative investors some but clearly not all of what they like from a stock. The fertilizer giant has seen strong growth in recent years, but it hasn't seen fit to reward shareholders with a significant dividend.
Mosaic produces fertilizer and other agricultural products. It has benefited from the same strength in crop prices that have helped other ag companies, including seedmakers Monsanto (NYSE: MON ) and Dow Chemical (NYSE: DOW ) , in recent years.
What makes Mosaic special is that privately owned Cargill spun off a stake in the company several years ago and retains 64% of its shares. With BHP Billiton (NYSE: BHP ) having tried to buy out rival PotashCorp (NYSE: POT ) last year, Mosaic appears to be in the right industry at the right time.
But concerns about a Chinese slowdown have killed some of the enthusiasm over ag stocks like Mosaic. In September, shares of Agrium (NYSE: AGU ) , Terra Nitrogen (NYSE: TNH ) , and PotashCorp all had similarly bad months to Mosaic's terrible performance, but they've posted big comebacks in the first few days of the month. With some of the best growth in free cash flow in its industry, Mosaic arguably has the inside track to profits down the road.
Moreover, Mosaic recently became part of the S&P 500 index. That should help the stock get more exposure, especially as Cargill sells off some of its share holdings to investors.
The biggest disappointment for retirees and other conservative investors, however, is the stock's tiny dividend. Perhaps with Mosaic joining the ranks of the elite companies of U.S. industry, it will get the hint and start joining the hundreds of other stocks that have rewarded shareholders with better dividends recently. Once that happens, Mosaic will look a lot more attractive as part of a retirement portfolio.
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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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.