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.
During the financial crisis, Hudson City Bancorp (Nasdaq: HCBK ) was the poster child of a regional bank that had avoided the Wall Street excesses that led to the meltdown in the housing and mortgage markets. During 2008, when many big banks lost half or more of their value, Hudson City managed to limit its losses to just 10%. Eventually, though, time caught up with the Northeastern regional bank, and it now has to deal with a big drop in its share price, a slashed dividend, and an uncertain future. Can the bank pick itself up off the mat? Below, we'll revisit how Hudson City Bancorp 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 Hudson City Bancorp.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$3.31 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||5 years||Pass|
|Stock stability||Beta < 0.9||0.78||Pass|
|Worst loss in past five years no greater than 20%||(48.6%)||Fail|
|Valuation||Normalized P/E < 18||10.31||Pass|
|Dividends||Current yield > 2%||4.8%||Pass|
|5-year dividend growth > 10%||1%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||NM||NM|
|Total score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings including extraordinary items. Total score = number of passes.
Since we looked at Hudson City Bancorp last year, the bank has seen its score cut in half. After standing out from its industry peers, the regional bank now resembles some of its beaten-down counterparts much more closely.
During the financial crisis, big banks found themselves struggling to survive. With Bank of America (NYSE: BAC ) , JPMorgan Chase (NYSE: JPM ) , and Wells Fargo (NYSE: WFC ) all taking on massive acquisitions of institutions that either failed or likely would have failed without their intervention, most of the nation's largest financial institutions were having to swallow huge internal reorganizations at the same time that the world was falling apart around them. By contrast, through its conservative lending practices, Hudson City managed to avoid having to take government assistance during the financial crisis in 2008.
But early last year, Hudson City had its own round of trouble. The bank had to restructure its balance sheet, repaying loans and taking a big one-time hit to its income. As a result, the bank had its first annual loss as a public company in 2011, and the stock lost 50% of its value.
In its most recent quarter, Hudson City was back to its winning ways. But the bank is taking more time to get nonperforming loans off its balance sheet than in the past, raising some concerns even though it met earnings estimates.
For retirees and other conservative investors, Hudson City's dividend still stands well above most of its peers, even after a big payout cut last year. But the past year has tempered investor enthusiasm over the stock, and so investors should probably take a long, hard look before choosing to add Hudson City to 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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