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Is Microsoft the Right Stock to Retire With?

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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. Let's figure out what makes a great retirement-oriented stock, then examine whether Microsoft (Nasdaq: MSFT  ) has what we're looking for.

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 Microsoft.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $235 billion Pass
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 3 years Fail
Stock stability Beta < 0.9 1.07 Fail
  Worst loss in past five years no greater than 20% (44.4%) Fail
Valuation Normalized P/E < 18 14.4 Pass
Dividends Current yield > 2% 2.3% Pass
  5-year dividend growth > 10% 7.2% Fail
  Streak of dividend increases >= 10 years 5 years Fail
  Payout ratio < 75% 23.1% Pass
       
  Total score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Microsoft has a reputation for being more of a growth stock than a conservative pick for retirees. But as the business has matured, growth is harder to come by, and with many retirees owning long-held shares of Microsoft with big capital gains, tax considerations play a role in wanting to hang onto them.

Microsoft dominates the PC operating system and office-based software niches with its Windows and Office products. But many see that dominance eroding over time as people move away from PCs and toward mobile devices, where Microsoft has a much weaker presence. With Google (Nasdaq: GOOG  ) and Apple (Nasdaq: AAPL  ) leading the charge toward tablets and smartphones, Microsoft has largely been left behind.

That's not a fatal flaw for conservative investors, though. The key is how long Microsoft's cash-cow businesses will last, and whether the current stock price makes shares a bargain despite the possibility of a decline in those core offerings.

Moreover, Microsoft isn't completely without growth prospects. The company has moved into virtualization and also made a recent splash with its Kinect motion-sensor for its Xbox gaming system, which put Sony (NYSE: SNE  ) on the ropes with its uninspired competing Move controller.

With a score of just 5 out of 10 , Microsoft has enough risks to put it out of the top tier of retirement-ready stocks. It's not a terrible holding by any means, but if you keep looking, you can almost certainly do better.

Keep searching
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.

Add Microsoft to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Google and Microsoft are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers selection. The Fool has written puts on Apple, which is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 4:27 PM, wck59 wrote:

    Were you looking a data for MSFT when you compiled your stats?

    For example, in 2006 the dividend was $.09/share each quarter, now it is $.16/share per quarter. That is better than a 12% growth rate.

    Also Microsoft have had FCF every quarter, some quarters they spent more in share buybacks and diviends, but that should reduce FCF.

    You table looks rigged to fit your viewpoint.

  • Report this Comment On February 02, 2011, at 4:28 PM, wck59 wrote:

    Sorry, I meant diviends and stock repurchase shouldn't reduce FCF.

  • Report this Comment On February 02, 2011, at 4:39 PM, TMFGalagan wrote:

    @wck59 -

    Capital IQ, my data source, uses trailing 12-month figures. It reports $0.58 in the past year versus $0.41 in the year ending five years ago, based on the dividends paid figure in the company's annual report.

    Also, free cash flow isn't affected by buybacks or dividends; it's simply cash from operations less capital expenditures.

    best,

    dan (TMF Galagan)

  • Report this Comment On February 02, 2011, at 6:08 PM, wck59 wrote:

    You only have 4 years between you data points. (Jan 2008 to Jan 2011) However that doesn't meet your 10% goal. (~9%) If you consider that in 2009 most companies reduced, stopped or didn't increase the dividend, there are probably very few companies that can make your 10% goal.

    Anyway you might be missing the whole point. For future dividend income you what to buy stocks that are likely to continue growing dividends for many years and also have a depressed stock price. Microsoft is a prime canidate by those metrics.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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