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.
Conservative investors have learned to look at the household products space to find stocks that can stand up to tough times. Within the industry, Clorox (NYSE: CLX ) is a leader, with a strong brand and a long history of paying solid, growing dividends. But with so many big-name players fighting each other, can the relatively small Clorox stand up to the competition? Below, we'll revisit how Clorox 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 Clorox.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$9 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||0.38||Pass|
|Worst loss in past five years no greater than 20%||(12.1%)||Pass|
|Valuation||Normalized P/E < 18||18.52||Fail|
|Dividends||Current yield > 2%||3.5%||Pass|
|5-year dividend growth > 10%||14.8%||Pass|
|Streak of dividend increases >= 10 years||34 years||Pass|
|Payout ratio < 75%||55.5%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Clorox last year, the company has lost two points. Slower growth and a higher valuation explain the drop, and with increased competition in the consumer products space, Clorox is feeling a pinch.
Clorox has faced major challenges in a tough economic environment. The situation was so extreme that Clorox attracted a bid from activist investor Carl Icahn to buy out the company for $80 per share last year, and Icahn also believed that Colgate-Palmolive (NYSE: CL ) or Kimberly-Clark (NYSE: KMB ) might be among potential suitors for Clorox and could be willing to pay as much as 25% more than that for the company. In the end, though, Icahn's actions came to naught, and the stock settled back to a relatively lackluster performance.
But in its most recent quarterly report, Clorox did well, beating expectations and raising revenue growth guidance. Falling gross margins are a concern, reflecting rising costs for raw materials that the company wasn't able to pass through to customers. Still, that's a trend that many players through the industry are struggling with, as even the much-larger Procter & Gamble (NYSE: PG ) and Unilever (NYSE: UL ) are competing against cheaper private-label products that threaten margins and profit growth.
For retirees and other conservative investors, a 3.5% dividend yield is attractive, but the company's failure to grow quickly, along with a somewhat pricey valuation, argues for caution. Clorox has attractive defensive characteristics, but you might do better waiting for a pullback rather than being in a hurry to add the stock to your retirement portfolio right now.
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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