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.
One of the first products many kids ever become familiar with is chocolate, and when it comes to chocolate in the U.S., it's hard to beat Hershey (NYSE: HSY ) . The candy-maker is a household name and has come out with huge numbers of innovations in its illustrious history. But with strong competition and pricing pressure, can Hershey keep delivering the sweets? Below, we'll revisit how Hershey 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 Hershey.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$16.2 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||1 year||Fail|
|Stock stability||Beta < 0.9||0.26||Pass|
|Worst loss in past five years no greater than 20%||(18.9%)||Pass|
|Valuation||Normalized P/E < 18||24.02||Fail|
|Dividends||Current yield > 2%||2.1%||Pass|
|5-year dividend growth > 10%||6.1%||Fail|
|Streak of dividend increases >= 10 years||3 years||Fail|
|Payout ratio < 75%||51.7%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Hershey last year, the company has kept its six-point score. But the stock has risen nicely, with roughly a 25% gain in the past year.
Hershey has been an investor's dream over the long run. With extremely low share-price volatility even in choppy markets, Hershey lets you sleep well at night. Yet with total returns over the past five years of around 80%, Hershey has rewarded investors in an up-and-down market that has left many of its peers well behind. And that's not new for the candy maker.
But coming trouble may finally put a stop to Hershey's long run of almost uninterrupted success. Hershey will face more input price pressure in the near future, thanks to the drought. Unlike Kraft Foods (NYSE: KFT ) and Tootsie Roll (NYSE: TR ) , Hershey has particular exposure to cocoa prices, although conditions in the cocoa market have been relatively benign lately. Where Hershey shares potential problems with Kraft, Archer Daniels Midland (NYSE: ADM ) , and Heinz (NYSE: HNZ ) is with corn and sugar prices. Both have remained strong, and corn in particular could head even higher in light of poor expected crop yields from adverse weather conditions.
One controversial practice has also hurt Hershey's image: the use of child labor on cocoa farms. In response, though, the company agreed to spend millions of dollars to fight the practice.
For retirees and other conservative investors, Hershey's stock comes at a pricey valuation, and the lack of free cash flow growth is concerning. At this point, I'd prefer to wait for a lower stock price before jumping in with retirement portfolio money.
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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