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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.
Around the nation, millions of homeowners have been waiting for years for the housing market to turn around. With huge amounts of economic activity tied to housing, the bust has hurt homeowners, homebuilders, banks, and home improvement retailers like Lowe's (NYSE: LOW ) . But as hints of a turnaround finally start appearing, is it time to buy into a recovery in earnest? Below, we'll revisit how Lowe's 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 Lowe's.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$31.3 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||4 years||Pass|
|Stock stability||Beta < 0.9||1.04||Fail|
|Worst loss in past five years no greater than 20%||(26.8%)||Fail|
|Valuation||Normalized P/E < 18||15.09||Pass|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||22.9%||Pass|
|Streak of dividend increases >= 10 years||50 years||Pass|
|Payout ratio < 75%||35.3%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Lowe's last year, the company has gained a point. Improving cash-flow growth gave it a better score and also contributed to the rise in its stock price, gaining roughly 15% over the past year.
After years of depressing news, companies that rely on the housing industry have seen some impressive turnarounds so far in 2012. For instance, building materials companies USG (NYSE: USG ) and Masco (NYSE: MAS ) have seen demand rise enough that USG was able to boost its prices earlier this year, while Masco enjoys more orders for plumbing supplies and cabinetry that it provides. Both Lowe's and Home Depot (NYSE: HD ) have also seen some of the spoils of renovation activity, as both clamor to offer customers what they need to make their homes more desirable.
But more recently, the housing market has given a more mixed picture on Lowe's. In May, Lowe's saw its stock plunge more than 10% after it said same-store sales grew only 2.6% and issued a profit warning for the remainder of the year. With Home Depot having also missed its quarterly revenue estimates, some now wonder if expectations of a lasting recovery remain premature. Moreover, the psychological damage from the housing bust may never go away completely, which would put a ceiling on potential growth for Lowe's.
It's also important to understand just how fierce competition is right now. Home Depot has done a good job of poaching market share from Lowe's even as smaller specialty retailer Lumber Liquidators (NYSE: LL ) has managed to carve out a niche for itself in the flooring area. Lowe's has to battle just to remain even, let alone regain share in the industry.
For retirees and other conservative investors, Lowe's record of 50 straight annual dividend increases is impressive. But what isn't so impressive is the weak state of affairs in housing. Until a real recovery hits, Lowe's may not be the sort of rock-solid stock you want for your retirement portfolio.
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.
If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
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