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.
I'm dating myself, but as a kid, I remember playing the video game Laser Blast for hours, finally reaching the top million-point score before the screen revealed a simple message. Video gaming has come a long way since then, but the company that made Laser Blast, Activision Blizzard (Nasdaq: ATVI ) , is still around -- and still making the most of people's desire to play. But will the Internet change the playing field for the video game industry so much that Activision's days in the sun are over? Below, we'll look at how the company does on our 10-point scale.
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 Activision Blizzard.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$13.9 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.55||Pass|
|Worst loss in past five years no greater than 20%||(41.8%)||Fail|
|Valuation||Normalized P/E < 18||17.79||Pass|
|Dividends||Current yield > 2%||1.4%||Fail|
|5-year dividend growth > 10%||NM||NM|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||25.5%||Pass|
|Total score||6 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Activision started paying a dividend in 2010. Total score = number of passes.
With six points, Activision Blizzard puts up a pretty good score. The stock doesn't give conservative investors everything they want, but with good growth and a relatively new dividend payout, Activision seems to know what investors want.
It's tough to find Laser Blast anymore, but Activision has much more popular games today. The Call of Duty series has been a huge moneymaker, and the merger with Blizzard gave the company the popular World of Warcraft franchise, with more than 10 million subscribers. Those are big assets in an ultra-competitive space, as Take-Two Interactive (Nasdaq: TTWO ) has its similarly crucial Grand Theft Auto franchise that has also generated sales records in opening releases.
Increasingly, recurring-revenue models are playing a bigger role in profits for video game companies. Activision's Call of Duty: Elite attracted more than a million subscribers in the first six days it was available. Similarly, rival Electronic Arts (Nasdaq: EA ) has looked to subscription revenue to support its sports games.
The big challenge, though, comes from social gaming. Zynga's (Nasdaq: ZNGA ) recent IPO highlights the attractiveness of Web-based video games, and as Facebook approaches its own public offering, investors will pay even more attention to the hybrid "freemium" business models that Zynga and peer Glu Mobile (Nasdaq: GLUU ) have used to turn players of free games into paying revenue sources. Yet the fact that Zynga is valued at a higher market cap than Activision shows just how high expectations are for the newcomer -- and just how far Activision would have to fall.
For retirees and other conservative investors, Activision is an established player in the video game space and is a less volatile stock than other industry players. If you're willing to discount the probability that social-site gaming truly changes the landscape for video games forever, then Activision could make a smart addition to your 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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