Is Berkshire Hathaway the Right Stock to Retire With?

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 Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) 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 Berkshire Hathaway.

Factor What We Want to See Actual Pass or Fail?
Size Market cap > $10 billion $165.1 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 4 years Pass
Stock stability Beta < 0.9 0.47 Pass
  Worst loss in past five years no greater than 20% (31.8%) Fail
Valuation Normalized P/E < 18 14.29 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Streak of dividend increases >= 10 years NM NM
  Payout ratio < 75% NM NM
  Total score   6 out of 8

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Berkshire Hathaway has never paid a dividend. Total score = number of passes.

With six points, Berkshire Hathaway lacks one thing that conservative investors like to see in their stocks: a dividend. But with a host of strong businesses under the Berkshire umbrella, investors may nevertheless want to give Warren Buffett's famous company a second look.

Berkshire's core is its insurance operation. With car insurance giant Geico and Berkshire's own insurance and reinsurance operations, the company has made a business of taking smart risks and then investing premiums to obtain superior returns that then flow to the company's bottom line.

Thanks to having significant amounts of cash on hand, Berkshire has been able to use Buffett's reputation to take advantage of major market panics. In 2008, he provided capital to Goldman Sachs (NYSE: GS  ) and General Electric (NYSE: GE  ) in packages that combined impressive preferred stock dividends with equity kickers in the form of warrants. Goldman and GE have paid back the money to redeem their preferred stock, but the warrants still have years to run. The returns have been so impressive that Buffett did the same sort of deal with Bank of America (NYSE: BAC  ) recently.

Many worry that Buffett's advanced age presents big risk when he inevitably steps down from his role. But in fact, that might open the door to the stock paying a dividend if Buffett's successor decides that reinvesting every penny of the company's float isn't the optimal strategy.

Retirees and other conservative investors who need income won't like Berkshire's lack of a payout. But even in troubled times and despite its concentration in the financial industry, Berkshire is still a good bet for a 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 Berkshire Hathaway 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 owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Bank of America. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. 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 (2) | Recommend This Article (4)

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 26, 2011, at 12:37 PM, DoctorLewis4 wrote:

    To mark Berk down as a fail in the dividend box is just silly. Berk owns some of the best dividend stocks in the market. Any shareholder in Berk trusts Berk to invest those dividends in a more effective way then handing out the cash to shareholders. As Warren and Charlie have said, the minute they feel they can't do this anymore is when Berk will offer a dividend. That will be a sad day.

  • Report this Comment On September 26, 2011, at 6:54 PM, dbtheonly wrote:

    I've got to agrtee that BRK is an excellent stock, but once one retires, the lack of a dividend becomes more important. After retirement the cash flow a good dividend payer provides is just too important. I'm not dumping BRK, but I'm not going to add any within 2 years of planned retirement.

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