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.
SAP (NYSE: SAP ) isn't a household name among American consumers, but businesses have been familiar with the German software giant for decades. As a specialist in enterprise software, SAP has locked horns with Oracle (Nasdaq: ORCL ) for the lucrative business that corporate customers provide, with the high stakes of recurring revenue from software bundles that can make or break software companies. As the enterprise software space gets more competitive, though, can SAP keep up with the rapid pace of innovation? Below, we'll revisit how SAP 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 SAP.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$67.8 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||5 years||Pass|
|Stock stability||Beta < 0.9||0.63||Pass|
|Worst loss in past five years no greater than 20%||(31.8%)||Fail|
|Valuation||Normalized P/E < 18||19.35||Fail|
|Dividends||Current yield > 2%||1.6%||Fail|
|5-year dividend growth > 10%||10.3%||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||20.5%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at SAP last year, the company has kept its six-point score. But the industry has been far from flat, with plenty going on that SAP has had to respond to in order to keep its position.
SAP has had a strong position in the enterprise software business for a long time, splitting market share primarily with Oracle. The rise of salesforce.com (NYSE: CRM ) and the advent of cloud-based offerings from Microsoft (Nasdaq: MSFT ) and other players in the space, however, have threatened that position, forcing long-established players to adapt to changing conditions.
SAP has responded by going after Oracle forcefully. That strategy has brought some success, as SAP has seen its HANA database product gain in popularity, striking at one of Oracle's key core businesses.
Late last month, SAP announced that it planned to buy Ariba (Nasdaq: ARBA ) for $4.5 billion. The move will help SAP bolster its presence in the cloud computing space, as Ariba's software helps businesses coordinate supply chains by bring buyers and sellers together. With Oracle having completed its acquisition of recruiting and HR software provider Taleo in April hot on the heels of SAP's bid for SuccessFactors, the arms race to bring remote applications under the umbrella of the software giants is red-hot.
For retirees and other conservative investors, it's clear that SAP is a rapidly evolving company that no longer has carte blanche to rule over its industry. SAP is doing a reasonably good job of competing, but only those willing to take substantial risks in their retirement portfolio should consider adding it as part of their technology exposure.
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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