Recs

0

Is Costco the Right Stock to Retire With?

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...

Click Here Now

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 Costco (Nasdaq: COST  ) 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 Costco.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$35.3 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

0.76

Pass

 

Worst loss in past five years no greater than 20%

(24.0%)

Fail

Valuation

Normalized P/E < 18

24.87

Fail

Dividends

Current yield > 2%

1.2%

Fail

 

5-year dividend growth > 10%

12.5%

Pass

 

Streak of dividend increases >= 10 years

8 years

Fail

 

Payout ratio < 75%

25.4%

Pass

 

 

 

 

 

Total score

 

5 out of 10

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

With only five points, Costco isn't delivering everything that conservative investors want from their investments. The warehouse giant pioneered the big-box store concept, but the company now faces the retirement of its well-renowned CEO.

Costco has an amazing business model that resonates well with shoppers. The company collects a membership fee that gives shoppers access to Costco's deals, which reward bulk shopping and include attractive one-time deals. That combination has allowed Costco to hold up well against both mega-retailer Wal-Mart (NYSE: WMT  ) and its Sam's Club warehouses as well as discounters like Target (NYSE: TGT  ) and Big Lots (NYSE: BIG  ) . That same business model is what has attracted private equity investors to smaller regional rival BJ's Wholesale (NYSE: BJ  ) , which has also had better-than-expected results recently.

Costco is well-known for treating all of its stakeholders well, from employees and shoppers to investors. That has led not only to higher wages and benefits for its workers but also to dividend increases for shareholders.

Recently, though longtime CEO Jim Sinegal said that he would retire at the end of the year. Many are concerned about how any future CEO could step into his role, but Sinegal plans to advise the new candidate through 2012.

Retirees and other conservative investors may balk at fairly high valuations and a relatively low dividend yield. But if the company can find a good successor to Sinegal, then Costco still deserves a close look to see if it belongs in your 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 Costco 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 Costco and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Costco, as well as creating a diagonal call position in Wal-Mart. 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.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 14, 2011, at 11:39 AM, DoctorLewis4 wrote:

    Costco is the gold standard in retail. They don't do everything Wall Street wants them to do - which is why I like them so much. Moving forward I couldn't think of a better stock to be the corner stone of a retirement portfolio.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1552835, ~/Articles/ArticleHandler.aspx, 10/22/2014 4:01:41 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

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.

Today's Market

updated 6 hours ago Sponsored by:
DOW 16,614.81 215.14 1.31%
S&P 500 1,941.28 37.27 1.96%
NASD 4,419.48 103.40 2.40%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2014 4:00 PM
COST $130.28 Up +1.86 +1.45%
Costco Wholesale CAPS Rating: *****
BIG $46.10 Up +0.75 +1.65%
Big Lots CAPS Rating: ***
BJ.DL $0.00 Down +0.00 +0.00%
BJ's Wholesale Clu… CAPS Rating: ****
TGT $61.64 Up +1.35 +2.24%
Target CAPS Rating: ***
WMT $76.02 Up +0.88 +1.17%
Wal-Mart Stores CAPS Rating: ***

Advertisement