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 Starbucks (Nasdaq: SBUX ) 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 Starbucks.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$29.7 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||3 years||Fail|
|Stock stability||Beta < 0.9||1.23||Fail|
|Worst loss in past five years no greater than 20%||(53.8%)||Fail|
|Valuation||Normalized P/E < 18||29.77||Fail|
|Dividends||Current yield > 2%||1.3%||Fail|
|5-year dividend growth > 10%||30%*||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||33.4%||Pass|
|Total score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. *Dividend growth since Starbucks started paying a dividend in April 2010. Total score = number of passes.
With only four points, Starbucks isn't perking up conservative investors with the same energy that its customers get from its coffee. Although the company has recently gotten on the dividend bandwagon, increased competition and higher coffee costs are threatening its continued growth.
Commodity price inflation has affected many industries, and the coffee market is no exception. Last year, Starbucks had to raise its prices to make up for a huge jump in the cost of coffee. Competitors are feeling the pinch as well; Kraft Foods (NYSE: KFT ) and J.M. Smucker (NYSE: SJM ) have both hiked retail prices on their store-sold coffee.
In addition, Starbucks is far from alone in the premium coffee business. Its pact with Green Mountain Coffee Roasters (Nasdaq: GMCR ) represents a truce on the single-serve coffee-maker front, but challenges from McDonald's (NYSE: MCD ) and soon-to-be public Dunkin' Donuts have forced Starbucks to be more proactive about maintaining and building its business.
To try to find new growth, Starbucks is doing what fast-food companies like McDonald's and Yum! Brands (NYSE: YUM ) have been doing for years: going international. The coffee giant still gets more than three-quarters of its business from the U.S., but opening more stores abroad and opening more direct channels to foreign consumers have helped boost its overseas share of revenue, and cost-cutting moves have worked to improve the bottom line as well.
Those moves make Starbucks a reasonable choice for growth investors. But for retirees and other conservative investors, the competitive nature of the business, along with significant volatility in share prices and free cash flow, suggest that owning Starbucks stock could give investors a rough ride. Once the company has a longer history of dividend growth, Starbucks may become a better choice for 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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