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 Aflac (NYSE: AFL ) 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 Aflac.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$21.2 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||5 years||Pass|
|Stock stability||Beta < 0.9||1.76||Fail|
|Worst loss in past five years no greater than 20%||(25.5%)||Fail|
|Valuation||Normalized P/E < 18||10.67||Pass|
|Dividends||Current yield > 2%||2.7%||Pass|
|5-year dividend growth > 10%||20.3%||Pass|
|Streak of dividend increases >= 10 years||28 years||Pass|
|Payout ratio < 75%||25.6%||Pass|
|Total score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With eight points, Aflac quacks up just about everything that conservative investors want from a stock. You can see the impact of the financial crisis on the company's stock volatility, but apart from that, Aflac has been a solid dividend payer with stable growth.
Most U.S. investors know Aflac largely from its commercials. But for decades, Aflac has turned the supplemental insurance business into a goldmine for shareholders. By focusing on the Japanese market, which features higher customer retention and huge market penetration, Aflac frees up its assets for long-term investment.
One of the ways it has produced such strong results for shareholders is by beating the greats at their own game. While fellow insurers Berkshire Hathaway (NYSE: BRK-B ) and Markel (NYSE: MKL ) are well known for taking the float and investing it capably, Aflac has beaten the two companies on return on equity consistently over the years.
The recent disaster in Japan obviously hurt the company. But unlike MetLife (NYSE: MET ) and Prudential (NYSE: PRU ) , Aflac will only have health-related claims to deal with, rather than the added cost of covering property damage. With only 5% of policyholders in affected areas, the company doesn't expect a material hit to earnings.
With almost three decades of raising its dividend every year while maintaining a super-low payout ratio, Aflac is a retired investor's dream stock. The insurance industry isn't a free lunch, as recent world events have shown, but for those willing to ride out the inevitable bumps, Aflac is a strong opportunity that should do well in retirement portfolios.
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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