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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 SAP (NYSE: SAP ) 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 SAP.
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||5 years||Pass|
|Stock stability||Beta < 0.9||0.53||Pass|
|Worst loss in past five years no greater than 20%||(31.8%)||Fail|
|Valuation||Normalized P/E < 18||21.53||Fail|
|Dividends||Current yield > 2%||1.4%||Fail|
|5-year dividend growth > 10%||10.6%||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||32.5%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, SAP doesn't have everything conservative investors like to see from the stocks they hold in their retirement portfolios. Like many of its peers, the software giant has been stingy on dividends, although its consistent growth and recent push toward increasing payouts are both encouraging things to see.
With all the attention that investors have given to up-and-coming enterprise solutions companies like cloud player salesforce.com (NYSE: CRM ) , it's not surprising that many investors largely ignore SAP. The well-established German software company has been around for decades, giving Oracle (Nasdaq: ORCL ) a run for its money in providing business software to top companies.
Oracle, in fact, has been at SAP's throat for years. In the most recent chapter in their rivalry, Oracle sued SAP in 2007, alleging that SAP sold support to customers who downloaded Oracle software. Late last year, a court ruled that SAP had to pay $1.3 billion to Oracle. That's not a huge amount for a company SAP's size, but it isn't pocket change either.
SAP has se en consistent revenue and free-cash-flow growth over the past five years, and investors have rewarded the company with a multiple that not only exceeds Oracle's but also towers over software giant Microsoft (Nasdaq: MSFT ) and IBM (NYSE: IBM ) , whose software divisions also work with businesses. Yet SAP's estimated growth falls short of Oracle's, raising the question of whether SAP really deserves a higher valuation.
SAP has the stability that many retirees and conservative investors seek. But with a relatively low dividend yield and questions about its share price, SAP may not be the ideal stock for a 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.