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.
One of the biggest things that people look forward to when they go on vacation is staying in a nice hotel. But what smart investors realize is that it can be even more fun to profit from hotels than it is to stay at them. Even with hundreds of options in the lodging space, Marriott International
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 Marriott.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10.5 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||2 years||Fail|
|Stock stability||Beta < 0.9||1.46||Fail|
|Worst loss in past five years no greater than 20%||(42.3%)||Fail|
|Valuation||Normalized P/E < 18||54.19||Fail|
|Dividends||Current yield > 2%||1.3%||Fail|
|5-year dividend growth > 10%||10.5%||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||49.6%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only four points, Marriott falls short of giving conservative investors the precise specifications they prefer in a stock. A temporary switch to a stock-based payout in 2009 and a reduction in the dividend in early 2010 gave shareholders a scare, and even though the company has since boosted its payout above its pre-cut levels, sluggish growth and a volatile share price still make investors nervous.
Marriott has two primary business segments. You're probably familiar with its hotel chains, but it also operates a timeshare management business. But in the near future, Marriott plans to spin off its timeshare unit into a separate stock, freeing its hotel management segment from the high capital requirements of timeshares and allowing it to compete more effectively against traditional rivals such as Starwood
But Marriott is also facing competitive pressure from new sources. HomeAway
For retirees and other conservative investors, the key to Marriott's future success lies in getting its very high multiple back down to reasonable levels and continuing to boost its payout in line with overall revenue and income growth. Until it accomplishes that, then Marriott is a bit too speculative to warrant putting into a conservative 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 ."