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.
Few companies have the huge breadth that German conglomerate Siemens (NYSE: SI ) has. With businesses ranging from alternative energy and technology infrastructure equipment to medical devices and insurance, Siemens gives investors a little of everything. But with Europe threatening to tear itself to pieces, the company's stock hasn't done well lately. Can Siemens survive a eurozone crisis? Below, we'll revisit how Siemens 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 Siemens.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$77.5 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||3 years||Fail|
|Stock stability||Beta < 0.9||1.00||Fail|
|Worst loss in past five years no greater than 20%||(52.5%)||Fail|
|Valuation||Normalized P/E < 18||13.96||Pass|
|Dividends||Current yield > 2%||4.4%||Pass|
|5-year dividend growth > 10%||15.7%||Pass|
|Streak of dividend increases >= 10 years||3 years||Fail|
|Payout ratio < 75%||64.8%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Siemens last year, the company has kept its six-point score. The company's big share-price decline has boosted its yield, but a drop in earnings has also pushed its payout ratio significantly higher.
In many investors' minds, the easiest way to understand Siemens is to think of it as a German version of General Electric (NYSE: GE ) . The two compete in numerous areas, including wind turbines and high-tech medical equipment. But one area where Siemens saved itself from a big catastrophe was by avoiding exposure to the financial crisis -- a mistake that almost brought GE to its knees.
Now, though, Europe faces its own crisis, and even though Germany has thus far withstood the pressures from the rest of the continent fairly well, it is still suffering from its effects. To try to offset slow economies in Europe, Siemens is trying to boost its international business. Earlier this month, the company announced a $10 million order to provide diesel-electric propulsion systems for two Navy ships, but it will take a lot more deals like that to help pull Siemens back up.
Siemens faces other troubles as well. Its networking joint venture with Nokia (NYSE: NOK ) has been losing money, as it has faced tough competition from Ericsson (Nasdaq: ERIC ) and Alcatel-Lucent (NYSE: ALU ) in emerging markets such as India. If the global economy starts going south as well, it will leave Siemens with nowhere to run to avoid problems.
For retirees and other conservative investors, a yield above 4% certainly looks lucrative. The big question is whether you have the risk tolerance to put up with major uncertainty about what will come next in Europe. If you think Siemens will survive and thrive in the long run, then you may never have a better buying opportunity than you have 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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