Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
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 Diageo (NYSE: DEO ) 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 Diageo.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$47.4 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.37||Pass|
|Worst loss in past five years no greater than 20%||(32.6%)||Fail|
|Valuation||Normalized P/E < 18||20.08||Fail|
|Dividends||Current yield > 2%||3.2%||Pass|
|5-year dividend growth > 10%||5.3%||Fail|
|Streak of dividend increases >= 10 years||12 years||Pass|
|Payout ratio < 75%||51.2%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, Diageo gives conservative investors much of what they'd like to see in a stock. Consistently strong dividends and revenue growth are attractive traits for the company, but what may be even more promising is a potentially huge growth opportunity for the future.
Diageo has a well-diversified business in beer and liquor, with brands including Guinness, Smirnoff, and Jose Cuervo. Like beer competitors Anheuser-Busch InBev (NYSE: BUD ) and Boston Beer (NYSE: SAM ) , Diageo's shares have performed fairly well during tough economic times as demand for spirits has remained relatively strong.
The interesting opportunity comes from the restructuring of Fortune Brands (NYSE: FO ) . Fortune has sold its golf division and plans to spin off its home and security business later this year. That will leave Fortune with its spirits business, which includes Jim Beam bourbon. If Diageo were to buy out the remaining Fortune business, it would help Diageo go up against Brown-Forman (NYSE: BF-B ) and its Jack Daniel's brand.
With a healthy and growing dividend, Diageo appeals to retirees and other conservative investors seeking income from their stock portfolios. The growth that could come from a Fortune acquisition would just be icing on the cake.
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 Diageo 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.