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.
Dell (Nasdaq: DELL ) was one of the rags-to-riches stories of the 1990s, as the company that is now synonymous with selling personal computers to the mass consumer market went from obscurity to familiarity. Yet even as it beat much larger companies to arguably win the PC hardware sales crown, Dell has gone nowhere since the tech bust, with its stock having lost two-thirds of its value since its 2000 peak. Can Dell get back to its old glory, or is it doomed to return to its humble beginnings? Below, we'll revisit how Dell 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 Dell.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$27.7 billion||Pass|
|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||3 years||Fail|
|Stock stability||Beta < 0.9||1.36||Fail|
|Worst loss in past five years no greater than 20%||(58.2%)||Fail|
|Valuation||Normalized P/E < 18||10.88||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||NM||NM|
|Payout ratio < 75%||NM||NM|
|Total score||2 out of 8|
Source: S&P Capital IQ. NM = not meaningful, as Dell pays no dividend. Total score = number of passes.
Since we looked at Dell last year, the company hasn't improved on its two-point score. The computer-maker is struggling to move beyond its commodity-like PC business to more lucrative areas, but so far, its attempts haven't borne much fruit.
Dell's strength in PC sales is indisputable. But while that gives the company impressive amounts of revenue, its margins are very low compared to many of its competitors. IBM (NYSE: IBM ) , for instance, arguably ceded the PC business to Dell in the 1990s, but it has evolved beyond hardware to build up a higher-margin overall business model.
Dell has taken steps to try to emulate the IBM approach and boost margins. Its acquisitions of SonicWall and Wyse Technology have put it in position to compete directly against Cisco Systems (Nasdaq: CSCO ) and Hewlett-Packard (NYSE: HPQ ) in providing full-fledged enterprise suite solutions. Yet other moves, including its failed Dell Streak tablet and its now-discontinued smartphones, haven't been as successful and threaten to leave the company behind in the mobile revolution.
Dell hasn't given up on tablets, though. It plans to release new ones later this year based on the Windows 8 operating system. The key to its success or failure will be whether Dell can use its extensive business contacts to make existing customers choose its tablet over the iPad or other competing devices. Given that both HP and Nokia (NYSE: NOK ) are also looking to Windows-powered tablets to make their own comebacks, Dell has an uphill battle ahead of it.
For retirees and other conservative investors, Dell is now one of the few tech stocks that still doesn't pay a dividend. Until the company gets healthy enough to make a payout, it's going to lack an essential attribute that's important to most people for their 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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