Your nest egg needs to grow, but you can't afford to break it in retirement, either. Image source: taxcredits.net via Flickr.
Even if you're retired, you should probably still be invested in stocks to at least some degree. After all, the average person today will live beyond 80, so it's important to continue growing your wealth for the long term.
However, that doesn't mean any old stock will do; to the contrary, there are plenty of stocks that are just plain wrong for retirees. We asked three of our top contributors to tell us about one, and they gave us Avon Products (AVP), Caterpillar (CAT -0.51%), and Transocean (RIG 2.27%). These are three well-known companies with strong brands and relationships with customers, but each has its faults as an investment that make them poor choices for retirees.
Here's why our contributors think retirees should avoid these three companies -- at least right now.
Steve Symington
Retirees looking for steady income might be tempted by Avon's $0.06 per-share quarterly dividend, which offers a seemingly juicy 7.8% annual yield based on the cosmetics specialist's share price as of this writing. However, that high yield is primarily a consequence of a precipitous drop in the value of Avon shares during the past year amid extended macroeconomic and currency pressures:
Make no mistake: This drop should not be considered a buying opportunity. Earlier this month, Avon endured its latest drop when the company announced disappointing results for its third quarter, including a 22% year-over-year decline in revenue -- albeit "just" a 2% drop on a constant-currency basis -- to $1.7 billion. That translated to an adjusted net loss of $50 million, or $0.11 per share, which was even worse than the $0.08 per-share loss that analysts were expecting.
Even more worrisome was a report in September that Avon was considering whether to sell its entire business, but later had trouble finding a buyer, and was in talks to sell a partial stake -- potentially at a discount to raise cash -- to an outside investor. On top of that, a separate report suggested the company may be subject to a still-undisclosed SEC probe surrounding its "conduct, transactions, and/or disclosures."
Whether these specific concerns ultimately play out remains to be seen, and shareholders can expect to hear more about Avon's plans for the future at its upcoming investor day in January. At this point, however, it seems probable that not only will Avon's stock continue to fall, but its dividend will be reduced or eliminated as its troubles continue. Needless to say, I think Avon is a stock to avoid, not just for retirees, but for any investor who might be tempted by the hope of Avon's deceivingly high yield.
Daniel Miller
Caterpillar has definitely seen better days as its business continues to struggle worldwide as emerging market economies slow and weakness remains in its core mining market. Retirees might be tempted to buy stock in Caterpillar because it seems to be at the bottom of the cycle, and better days should be in store -- and its 4.27% dividend yield looks enticing. However, that's not a good move.
The main reason is time. Retirees can't afford to sit around and wait for a stronger global economy to boost sales of Caterpillar's earth-moving machines. The fact is, the near term doesn't look any brighter for Caterpillar and its stock price.
During Caterpillar's third quarter, sales and revenue checked in a whopping $2.5 billion lower than last year's third-quarter result of $13.5 billion. Furthermore, Caterpillar's profit per share plunged from $1.63 during last year's third quarter to $0.62 during this year's third quarter. Next year is more of the same, with management expecting sales and revenues to check in about 5% lower than 2015. That would mark the first time ever that Caterpillar's sales and revenues declined for four consecutive years.
Caterpillar does have plenty of good things for investors, such as a strong brand, extensive dealership network that provides a competitive advantage, and consistent value returned to shareholders through dividends and share buybacks. But the company remains leveraged toward coal mining, and a push to limit coal consumption in two critical markets, the U.S. and China, is a headwind that isn't going to lighten up in the near term. Retirees would be wise to avoid waiting for Caterpillar's eventual rebound.
Jason Hall
The oil and gas industry has been hammered during the past year-plus, and offshore drillers have taken it worse than most other segments. Offshore drilling giant Transocean has certainly not been immune to that:
Demand for offshore drilling has simply dried up. Factor in a glut of drilling vessels fighting over a much smaller amount of work, and it's been ugly. Yes, Transocean has done an admirable job of cutting expenses, and is probably going to be able to ride out the current environment, but it stands at risk of being a real value trap, even still.
Most experts are expecting 2016 to be even worse than 2015 for offshore drillers. This is because much of the work that drillers completed this year is tied to contracts signed in years prior when oil prices were much higher. With oil prices staying below $50, and plenty of onshore supplies to meet current global demand, expectations are for even less new drilling work next year.
While growth over the long term is important for retirees, avoiding capital losses is still important. The upside of Transocean over time may be worth the risk for a 30-year-old. But retirees are probably better off staying away, at least until the market begins to recover. But because nobody knows when that will happen, the risk today probably outweighs the potential returns with any capital investors may depend on in the next several years.
Don't think that the dividend is something you can count on, either. It may look like a 12% yield right now, but it's really only paying out 4% after the huge cut earlier this year to $0.15 per share per quarter.
