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.
For many people, the main claim to fame for Texas Instruments (NYSE: TXN ) comes from its pioneering calculators, which are still the standard throughout the engineering and financial worlds. But TI's current business goes well beyond handheld devices, as it makes a variety of chips for a huge number of different applications, ranging from touch-screen controllers to processors and smart radio chips. But in a dog-eat-dog industry, can TI keep up with the competition? Below, we'll revisit how Texas Instruments 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 Texas Instruments.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$33.6 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||3 years||Fail|
|Stock stability||Beta < 0.9||1.10||Fail|
|Worst loss in past five years no greater than 20%||(52.8%)||Fail|
|Valuation||Normalized P/E < 18||18.92||Fail|
|Dividends||Current yield > 2%||2.3%||Pass|
|5-year dividend growth > 10%||27.5%||Pass|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||45.4%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Texas Instruments last year, the company has dropped two points. Falling revenue and weak earnings that boosted valuations were responsible for the loss, and the stock only managed to post a 10% in the past year.
Texas Instruments isn't necessarily the best-known chipmaker out there. But having recently joined the Nasdaq 100, it's one of the biggest players in the industry.
But TI hasn't been able to make investors entirely happy. In its most recent quarter, the company topped analysts' earnings estimates, but its guidance for the current quarter was well short of expectations. In the words of CEO Rich Templeton, customers were "increasingly cautious in placing new orders," and the trend among smartphones seems to be moving away from TI's OMAP mobile processor line. With Qualcomm (Nasdaq: QCOM ) having recently added a quad-core mobile chip, OMAP's dual core structure begins to look a bit antiquated.
Still, Texas Instruments is fighting to retain its position in the industry. After concerns that Amazon.com (Nasdaq: AMZN ) would replace its Kindle Fire's processing chip with NVIDIA's (Nasdaq: NVDA ) quad-core Tegra 3, the online retail giant stuck with TI's OMAP series, touting benchmarks faster than the Tegra 3. Moreover, it's teamed up with iRobot (Nasdaq: IRBT ) to provide low-power mobile processors for its robots.
For retirees and other conservative investors, TI's score drop raises fears that the company may be losing its position in the chip industry. With other tech companies raising dividend payouts, TI's 2.4% yield no longer stands out as much as it might have in the past. Risk-averse investors should carefully weigh the potential dangers before considering putting Texas Instruments in their retirement portfolios.
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.
Amazon may have saved TI a lot of trouble by keeping its chips in the newest Kindle, but Amazon faces challenges of its own. Learn all about Amazon's competitive position in the Fool's premium report on the online retail giant today.
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