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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 Lockheed Martin (NYSE: LMT ) 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 Lockheed Martin.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$27.9 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||0.99||Fail|
|Worst loss in past five years no greater than 20%||(18.6%)||Pass|
|Valuation||Normalized P/E < 18||11.85||Pass|
|Dividends||Current yield > 2%||3.7%||Pass|
|5-year dividend growth > 10%||20.2%||Pass|
|Streak of dividend increases >= 10 years||9 years||Fail|
|Payout ratio < 75%||33.1%||Pass|
|Total score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Lockheed Martin racks up eight points and just misses out on a ninth. The defense company has seen pressure from budgetary concerns, but the stock has a long history of doing right by conservative investors.
As we saw last week with Raytheon (NYSE: RTN ) , Lockheed is just one of many defense contractors that has faced the pain of potential government budget cuts. As Fool analyst Andrew Tonner described in great detail, those fears may well be overblown, but that hasn't stopped nervous investors from bidding shares down to bargain levels.
The interesting thing is that the defense industry is adapting to the new conditions well. Last year, Boeing (NYSE: BA ) succeeded with an offer to sell F-18 fighters at a discount. Lockheed and General Dynamics (NYSE: GD ) submitted bids to the Navy in which they offered 20 ships for the price the Pentagon originally expected to pay for 15.
It's true that there's great uncertainty in the defense industry right now. But Lockheed shareholders get a lot for taking on that risk. Its dividend yield beats out that of Boeing, Raytheon, and Northrop Grumman (NYSE: NOC ) , and despite a market-matching level of volatility over the past five years, its stock has been more stable recently. For retirees and other conservative investors, Lockheed is definitely worth a closer look as one to add to your retirement portfolio.
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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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.