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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 Travelers (NYSE: TRV ) 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 Travelers.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$25.6 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||0.59||Pass|
|Worst loss in past five years no greater than 20%||(13.8%)||Pass|
|Valuation||Normalized P/E < 18||10.50||Pass|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||9.2%||Fail|
|Streak of dividend increases >= 10 years||6 years||Fail|
|Payout ratio < 75%||20.9%||Pass|
|Total score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Travelers scores a respectable seven points. The insurance company has held up quite well compared to some of its peers and continues to reward shareholders with relatively stable share prices and increasing dividends.
The insurance industry has suffered a lot in recent years. After the stress of the financial crisis and ensuing market meltdown, many insurers saw their stocks recover sharply. But the low rates that have hurt savers have also bitten into insurance company profits, as the interest that insurers earn on their investments has fallen. Travelers recently reported that low rates could cut $100 million from its bottom line annually from 2011 to 2013, and Hartford Financial (NYSE: HIG ) predicted a similar hit of $130 million over the next two years. In response, several companies are exiting unprofitable lines of business, with MetLife (NYSE: MET ) discontinuing new long-term care policies and Genworth Financial (NYSE: GNW ) halting sales of variable annuities.
Long-term investors understand, though, that the insurance business is cyclical. Periods like this are painful for major insurers like Travelers, but they also help weed out weaker competitors, eventually allowing the survivors to raise rates and increase their profits.
Current concerns aside, Travelers avoided a major stock drop during the bear market and has posted good gains in the past two years. For conservative investors searching for a solid stock in the insurance industry, Travelers is worth a closer look.
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.
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