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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 Accenture (NYSE: ACN ) 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 Accenture.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$33.9 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.78||Pass|
|Worst loss in past five years no greater than 20%||(7.5%)||Pass|
|Valuation||Normalized P/E < 18||17.80||Pass|
|Dividends||Current yield > 2%||2.5%||Pass|
|5-year dividend growth > 10%||26.3%||Pass|
|Streak of dividend increases >= 10 years||6 years||Fail|
|Payout ratio < 75%||28.3%||Pass|
|Total score||7 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Accenture scores seven points, showing that the stock gives conservative investors quite a bit of what they like to see. The consulting company has put together an admirable record of boosting its dividend substantially even through the recession.
As a management and technology consulting company whose roots came from Arthur Andersen, Accenture doesn't have the highest profile, but that's generally been a good thing lately. In contrast to the drama at Hewlett-Packard (NYSE: HPQ ) and its revolving-door executive suite, Accenture has simply delivered quarter after quarter of analyst-beating performance. In IT, it even stands up well to industry giant IBM (NYSE: IBM ) , which is notorious for having moved from low-margin hardware to high-margin services and support, and has seen more consistent results than Computer Sciences (NYSE: CSC ) . The company even got tagged to take over support responsibilities on Nokia's (NYSE: NOK ) Symbian software.
At its current valuation, Accenture is a little pricier than we prefer to see. But the company clearly thinks its shares are underpriced. It recently announced a $5 billion buyback program, along with a 50% dividend increase that boosted its yield to 2.5%.
Retirees and other conservative investors have to admire a company that limited its losses during the recession and has committed to treating shareholders well. If an overall market downturn pushes Accenture's shares lower, then it could easily become a great value play that makes a smart part of any retirement portfolio.
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."