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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 Staples (Nasdaq: SPLS ) 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 Staples.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$9.7 billion||Fail|
|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||3 years||Fail|
|Stock stability||Beta < 0.9||0.84||Pass|
|Worst loss in past five years no greater than 20%||(21.2%)||Fail|
|Valuation||Normalized P/E < 18||11.34||Pass|
|Dividends||Current yield > 2%||2.9%||Pass|
|5-year dividend growth > 10%||11.6%||Pass|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||28.7%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, Staples gives conservative investors much of what they're looking for. The company that pioneered the Easy Button hasn't been able to solve the weak economy, but its shares have held up reasonably well through the ups and downs of the stock market.
Staples provides a good example of the challenges that many traditional retailers are dealing with. The company has almost 2,300 stores throughout the U.S. and 25 other countries. But whereas that geographical penetration used to be desirable, those bricks-and-mortar locations now represent cost centers with goods that are becoming obsolete.
But what many don't realize is that Staples is actually second only to Amazon.com (Nasdaq: AMZN ) in terms of online sales. Although competitors OfficeMax (NYSE: OMX ) and Office Depot (NYSE: ODP ) both make the top 10, Staples' competitive advantage here has undoubtedly helped it cement its place atop the office retail industry.
The question is what comes next for the industry. Consolidation is a definite possibility, and with Staples dwarfing Office Depot and OfficeMax, it would likely be the aggressor in any potential merger. As Wal-Mart (NYSE: WMT ) ventures into the office supply space, though, it's possible that the retail giant might pursue Staples.
For retirees and other conservative investors, Staples' dividend yield of nearly 3% is extremely attractive, as is the fact that the company has raised its dividend every year since it started making payouts in 2004. But that doesn't eliminate the big risks that the company faces going forward. Before you put Staples into your retirement portfolio, you'll want to feel confident that the company can overcome its obstacles and dominate its space even with rising competition.
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.
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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."