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Is ITT 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 ITT (NYSE: ITT  ) 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 ITT.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$8.6 billion

Fail

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

1.14

Fail

 

Worst loss in past five years no greater than 20%

(29.5%)

Fail

Valuation

Normalized P/E < 18

10.97

Pass

Dividends

Current yield > 2%

2.2%

Pass

 

5-year dividend growth > 10%

20.1%

Pass

 

Streak of dividend increases >= 10 years

8 years

Fail

 

Payout ratio < 75%

26.1%

Pass

 

 

 

 

 

Total score

 

5 out of 10

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

With five points, ITT has some but not all of what conservative investors like to see in a stock. The industrial and defense technology company has an attractive dividend and is fairly cheap right now, but it's now undergoing a major transformation that will change the way shareholders invest in it.

ITT is a conglomerate with a lot of exposure to the defense industry. That hasn't been a good place to be lately, as fears of government budget cuts have kept valuations among defense company stocks at rock-bottom levels. Northrop Grumman (NYSE: NOC  ) , Lockheed Martin (NYSE: LMT  ) , and General Dynamics (NYSE: GD  ) all trade even more cheaply than ITT, with single-digit P/E ratios.

But ITT goes well beyond defense, and that has led the company to break up into three separate publicly traded stocks. After the breakup, the company will spin off its defense segment into one company, its water technology business into another, and maintain its industrial engineering business as ITT going forward. Yet after investors initially jumped on the news, ITT stock has settled back down during the recent stock market slump.

Unfortunately for retirees and other conservative investors, the spinoff leaves more questions than it does answers. For instance, the water tech company will compete against giants Siemens (NYSE: SI  ) and General Electric (NYSE: GE  ) , giving the business a whole new complexion compared to its current place within the larger ITT whole.

Until specific details about what each spun-off company will pay in dividends, it'll be hard for potential investors to decide whether they want to keep owning all three chunks of the former ITT or focus on one particular segment. For now, therefore, you'd probably be better off waiting to see what happens next.

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 ITT 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. The Motley Fool owns shares of Northrop Grumman, Lockheed Martin, and General Dynamics. 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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