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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.
To many investors, consulting is a black box that includes just about whatever you care to think of. Certainly among consulting firms, Accenture (NYSE: ACN ) has just about the widest reach imaginable, with expertise in risk management, relationship building, information technology, and outsourcing services of nearly all kinds. The company has gotten past any stigma it may have had from being formerly affiliated with the Arthur Andersen accounting firm, but can it continue to prosper? Below, we'll revisit how Accenture 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 Accenture.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$48.3 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||0.85||Pass|
|Worst loss in past five years no greater than 20%||(7.5%)||Pass|
|Valuation||Normalized P/E < 18||23.44||Fail|
|Dividends||Current yield > 2%||2.3%||Pass|
|5-year dividend growth > 10%||26.3%||Pass|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||37.2%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Accenture last year, the company has kept its seven-point score. The stock has risen nicely, though, jumping more than 30% in the past year.
With its headquarters in Ireland, Accenture may seem to be in the middle of a firestorm due to the economic troubles in Europe. Yet with European companies doing everything they can to cut costs, Accenture is actually getting a lot of business there, with successes in establishing a business management platform for Unilever (NYSE: UL ) and streamlining finances for the joint venture between Nokia (NYSE: NOK ) and Siemens among the higher-profile case studies that Accenture points to as examples of how it can help businesses.
What many people don't realize, though, is that Accenture is as much a technology player as many well-known names associated solely with tech. In many ways, IBM (NYSE: IBM ) borrowed a page from Accenture when it started moving seriously into IT consulting, and Hewlett-Packard (NYSE: HPQ ) is trying to follow in its footsteps by aiming at higher-margin services in lieu of low-margin hardware.
Just last Friday, investors got a reminder of just how lucrative consulting can be, as Accenture soared more than 7%. Fiscal fourth-quarter earnings were mostly in line with estimates, but the company's future guidance for next year's earnings was higher than where analysts had pegged them.
For retirees and other conservative investors, Accenture offers stock-price stability and a reasonable dividend. Its valuation is on the high side at the moment, but if Europe is indeed turning around, the stock may be a justifiable choice for a 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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