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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 United Parcel Service (NYSE: UPS ) 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 UPS.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$71.1 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||1 year||Fail|
|Stock stability||Beta < 0.9||0.82||Pass|
|Worst loss in past five years no greater than 20%||(19.7%)||Pass|
|Valuation||Normalized P/E < 18||21.05||Fail|
|Dividends||Current yield > 2%||2.9%||Pass|
|5-year dividend growth > 10%||7.3%||Fail|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||52.1%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
UPS delivers a good score of 6. The company hasn't been as consistent as some other stocks in giving conservative investors everything they look for in a stock for their retirement portfolios, but it measures up well against some of its peers.
UPS has struggled in recent years, as the recession put a lot of pressure on economically sensitive stocks. Relying on overall strength in business activity, UPS struggled to hold its own, as its inconsistent free cash flow growth shows. Yet even now, UPS and rival FedEx (NYSE: FDX ) face the challenges of disruptive uprisings in the Middle East and northern Africa, fallout from the Japanese earthquake, and high energy prices.
Still, one advantage UPS has over smaller competitors like CH Robinson Worldwide (Nasdaq: CHRW ) and Expeditors International (Nasdaq: EXPD ) is scale. Both in size and in scope of its offerings, which include an extensive air and ground transportation network for everything from letters to freight and air cargo, UPS dwarfs its competition in a business where having a big network gives you a huge logistical edge.
Given its cyclical nature, UPS falls short of some of the ideal qualities that retirees and other conservative investors strive for. But the company does a good job of leading its industry, and if you want to add some exposure to the broader transportation sector, you could do worse than buy UPS.
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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