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Is DuPont the Right Stock to Retire With?

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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 DuPont (NYSE: DD  ) 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 DuPont.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $43.6 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 1.41 Fail
  Worst loss in past five years no greater than 20% (40.3%) Fail
Valuation Normalized P/E < 18 18.47 Fail
Dividends Current yield > 2% 3.7% Pass
  5-year dividend growth > 10% 2.1% Fail
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 44.8% Pass
       
  Total score   4 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With a score of just four, DuPont doesn't give conservative investors everything they'd like to see in a stock. The chemical company has a solid dividend, but its stock has proven vulnerable to the choppiness in the overall market.

DuPont has a widely varied business. It produces agricultural products like seed and insecticides, going up against ag giant Monsanto (NYSE: MON  ) . It also makes materials for photovoltaic solar installation, plastics for auto production and other related uses, and even has a stake in a venture with Merck (NYSE: MRK  ) with its now off-patent Cozaar and Hyzaar anti-hypertension drugs.

The chemical business has been challenging for many of DuPont's competitors. Celanese (NYSE: CE  ) and Eastman Chemical (NYSE: EMN  ) have struggled to keep growing, while even Dow Chemical (NYSE: DOW  ) has seen free cash flow plummet in recent years. By contrast, while DuPont has unquestionably had volatile financial results, it has been calmer and more successful.

In fact, in its most recent quarter, DuPont saw some extremely strong results. Its largest segment, agriculture, saw a 10% increase in sales, while its smaller segments posted even better increases, with nutrition and health seeing a whopping 64% jump. With the company on track to meet its productivity targets, DuPont felt comfortable raising full-year 2011 guidance by $0.20 to $0.25 per share.

Retirees and other conservative investors may like DuPont's dividend the best of all of its positive attributes. Even though it gives investors a bouncier ride than they might prefer to see, DuPont is still worth a look for a well-balanced retirement portfolio.

Keep searching
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.

Add DuPont to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. You can follow him on Twitter here. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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9/2/2014 12:40 PM
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