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 Genuine Parts (NYSE: GPC ) 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 Genuine Parts.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$8.1 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.76||Pass|
|Worst loss in past five years no greater than 20%||(15%)||Pass|
|Valuation||Normalized P/E < 18||16.40||Pass|
|Dividends||Current yield > 2%||3.5%||Pass|
|5-year dividend growth > 10%||5.7%||Fail|
|Streak of dividend increases >= 10 years||55 years||Pass|
|Payout ratio < 75%||51.6%||Pass|
|Total score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Genuine Parts pounds out a score of 7. That's enough to give conservative investors a lot of what they're looking for, especially given the stock's healthy dividend yield and long record of payout growth.
As you'd expect from its name, Genuine Parts specializes in making parts. Its NAPA Auto Parts brand is its best known segment, but it also makes products for the industrial, office, and electrical industries. For instance, the company supplies office retailers Staples (Nasdaq: SPLS ) and Office Depot (NYSE: ODP ) , among others.
You might think that with a focus on autos, Genuine Parts would have struggled. But actually, the recession had benefits both for Genuine Parts and for parts retailers AutoZone (NYSE: AZO ) and Advance Auto Parts (NYSE: AAP ) . Even as carmakers saw sales of new vehicles decline, interest in maintaining older vehicles pushed car owners toward Genuine Parts' products. None of the three companies saw a yearly stock drop of more than 20%, and AutoZone actually saw gains every year.
Genuine Parts has two things that its competitors don't: a strong relationship with commercial customers, and a strong dividend payout for shareholders. Even O'Reilly Automotive (Nasdaq: ORLY ) , which gets half its revenue from its commercial business, has less than 7% of the commercial market. There's always the threat that parts retailers could try to push more strongly into the commercial business, but as long as the company pays for its top talent, then it should be able to maintain its competitive advantage.
Genuine Parts is a smaller company than some retirees and other conservative investors may feel comfortable with. But with a nice payout, income-hungry investors may want to give the parts maker 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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