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Is Coca-Cola 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 Coca-Cola (NYSE: KO  ) 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 Coca-Cola.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $145 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 4 years Pass
Stock stability Beta < 0.9 0.59 Pass
  Worst loss in past five years no greater than 20% (24.1%) Fail
Valuation Normalized P/E < 18 22.76 Fail
Dividends Current yield > 2% 2.8% Pass
  5-year dividend growth > 10% 9.7% Fail
  Streak of dividend increases >= 10 years 48 years Pass
  Payout ratio < 75% 52.6% Pass
       
  Total score   7 out of 10

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

Coca-Cola has many of the traits that retirement investors want to see in a stock. Even in the areas where Coke falls a little short, such as dividend growth and worst annual loss, the company only misses by a small margin.

Coca-Cola's biggest strength is its brand. Ranking the Coke brand No. 1 in its latest top 100 list, Interbrand values it at $70 billion, about five times that of rival PepsiCo (NYSE: PEP  ) .

It's that brand that has led to some of Coca-Cola's biggest growth opportunities. Global awareness has vaulted the company's prospects in fast-growing China, and like fellow consumer giants Wal-Mart (NYSE: WMT  ) and Procter & Gamble (NYSE: PG  ) , Coca-Cola is working hard to extend its brand dominance throughout the globe.

Perhaps the biggest knock on Coca-Cola stock right now is its valuation. With a multiple of 16 times next year's estimated earnings, the stock is more expensive than PepsiCo as well as smaller competitors such as Dr Pepper Snapple (NYSE: DPS  ) and National Beverage (Nasdaq: FIZZ  ) .

Despite a somewhat lofty share price, Coca-Cola is the kind of stock that could become part of a retiree's core portfolio. If you like both solid income and global growth prospects, Coke is it.

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 Coca-Cola 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. The Fool owns shares of Coca-Cola and Wal-Mart, which are Motley Fool Inside Value selections. Coca-Cola, PepsiCo, and Procter & Gamble are Motley Fool Income Investor selections. Wal-Mart is a Motley Fool Global Gains recommendation. Motley Fool Options has recommended a diagonal call position on PepsiCo. 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 (1) | Recommend This Article (11)

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 09, 2011, at 2:44 AM, esxokm wrote:

    Coca-Cola is absolutely a great stock to retire with. Ideally, you start investing in this name when you're young. Over time, the effective-yield potential should prove significant.

    One thing I must say about buying overvalued blue chips: with a name like Coca-Cola, you can afford to buy it even if your timing is off so long as you are buying mostly for the income angle and plan to dollar-cost-average.

    If you don't buy all at once, and have enough to buy on dips, you can average in to a decent cost basis over time.

    I myself purchased back in 1998 at the worst possible price (well over $80 per share), but I didn't stop buying. I've added to the position over the years. Now I'm solidly in profits.

    Unfortunately, you can't time the market. So hopefully people don't become too obsessed about buying a name like KO on the cheap. That may be somewhat of a controversial opinion, but at today's yield, I find the beverage giant very attractive. And, again, the younger you are, the more time you'll have to generate an awesome cost basis.

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Dan Caplinger
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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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