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.
Colgate-Palmolive (NYSE: CL ) isn't the biggest consumer products company out there, but it is still quite well known. With a variety of toothpaste and other personal care items as well as detergent and other household products, the company is well-placed for investors who want a solid defensive play with a reliable dividend. But given all the big players vying for household share, what can Colgate do to really stand out from the crowd? Below, we'll revisit how Colgate-Palmolive 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 Colgate-Palmolive.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$45.8 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||0.42||Pass|
|Worst loss in past five years no greater than 20%||(10.1%)||Pass|
|Valuation||Normalized P/E < 18||19.67||Fail|
|Dividends||Current yield > 2%||2.6%||Pass|
|5-year dividend growth > 10%||12.7%||Pass|
|Streak of dividend increases >= 10 years||48 years||Pass|
|Payout ratio < 75%||45.7%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Colgate-Palmolive last year, the company has actually given up a point. Longtime shareholders have benefited from strong outperformance from its stock over the past year, but that's left the stock at a rich valuation.
When you look at the numbers, most of the companies in the household consumer products space look very similar, with growing dividends and solid track records. Procter & Gamble (NYSE: PG ) is the biggest stock in the space and has several dominant brands, whereas Clorox (NYSE: CLX ) focuses more on niche areas like bleach. Even foreign competitor Unilever (NYSE: UL ) has many of the same attractive characteristics, having held up well during tough markets in the European arena and providing attractive dividends that have grown substantially in recent years.
But despite the allure of defensive stocks, Colgate and its peers have gotten so popular that their shares carry premium prices. Usually, you wouldn't expect Colgate to perform well in overall bull markets, but the stock has advanced strongly in the past year despite the S&P's flat performance.
The difference may be in brand loyalty. Colgate may not match P&G's brand strength, but it does have a brand that just misses hitting the top 50 in the world. That compares well even against much larger Johnson & Johnson (NYSE: JNJ ) , which falls further down in the top 100. That's likely because of the product recalls that have hit J&J hard in its consumer segment in recent years.
For retirees and other conservative investors, Colgate's near half-century of dividend increases matches well with P&G and J&J, and outpaces many of the other players in the industry. As long as Colgate can keep delivering consistent growth, it should make a good addition for retirement 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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