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.
Cal-Maine Foods (Nasdaq: CALM ) isn't a big company, but it's a giant in the egg business. In an industry that tends to be localized, Mississippi-based Cal-Maine has production facilities around the country, making it the largest fresh-shell egg producer in the country. With corn prices slated to go through the roof because of this year's drought, though, will the company be able to keep its winning ways? Below, we'll revisit how Cal-Maine Foods 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 Cal-Maine Foods.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$851 million||Fail|
|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||2 years||Fail|
|Stock stability||Beta < 0.9||0.47||Pass|
|Worst loss in past five years no greater than 20%||(4.5%)||Pass|
|Valuation||Normalized P/E < 18||13.75||Pass|
|Dividends||Current yield > 2%||4.1%||Pass|
|5-year dividend growth > 10%||75.6%||Pass|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||37.6%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Cal-Maine Foods last year, the company has kept its seven-point score. Yet although the stock hasn't moved much in the past year, some storm clouds on the horizon have investors worried about the future.
But feed costs present a big threat to the agricultural industry. Tyson Foods (NYSE: TSN ) and Sanderson Farms (Nasdaq: SAFM ) have already seen margins compress from the higher costs of producing their meat products, and Cal-Maine certainly has plenty of need for feed.
Already, Cal-Maine has seen its feed prices soar. The company offset the impact by boosting egg prices and by following Dean Foods (NYSE: DF ) in focusing more on specialty eggs in the organic and cage-free segments, but it's uncertain how far Cal-Maine can raise prices without harming demand. With corn prices on the rise because of the drought, Cal-Maine will face the same challenge for the foreseeable future.
But that hasn't stopped the company from making big moves. Last week, Cal-Maine announced a deal to buy Pilgrim's Pride's (NYSE: PPC ) commercial egg operations. Although terms weren't disclosed, the deal will only go further to cement Cal-Maine's dominance of the industry and add to its capacity in Texas.
Unlike many stocks, Cal-Maine doesn't give dividend investors the certainty they like to see in their payouts. With its variable dividend policy, the company basically pays out a third of its net income. So when times are tough, shareholders get hurt twice: through falling share prices and a smaller dividend check.
For retirees and other conservative investors, that dividend uncertainty can be difficult. But at a reasonable valuation, dealing with variable cash flow from Cal-Maine may be worth the hassle, especially if you think the egg producer can continue its winning ways well into the future.
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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