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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 HSBC Holdings (NYSE: HBC ) 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 HSBC.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$132.1 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.69||Pass|
|Worst loss in past five years no greater than 20%||(38.6%)||Fail|
|Valuation||Normalized P/E < 18||11.45||Pass|
|Dividends||Current yield > 2%||4.8%||Pass|
|5-year dividend growth > 10%||(12.7%)||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||26.1%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, HSBC gives conservative investors some of what they prefer from a stock. The British bank has seen many of the same problems as its peers over the past several years and is fighting hard to maintain its standing in the industry.
Banks across the Atlantic have struggled recently under the threat of the European sovereign debt crisis and other economic woes. That has forced some banks to take extraordinary measures to raise capital. For instance, HSBC sold its U.S. credit card business to Capital One Financial (NYSE: COF ) for $2.6 billion.
In addition, layoffs have become par for the course throughout the industry. Not only have fellow British banks Barclays (NYSE: BCS ) and Lloyds Banking Group (NYSE: LYG ) announced job cuts to shore up ailing bottom lines, but even U.S. banks Goldman Sachs (NYSE: GS ) and Bank of America (NYSE: BAC ) have put jobs on the chopping block. HSBC jumped on the bandwagon with plans to cut 30,000 jobs and sell of 195 U.S. retail banking branches. That will cut HSBC's presence in the U.S. by about half, but it's an integral part of producing the $2.5 billion to $3.5 billion in cost-cutting that the company has targeted over the next two years.
For retirees and other conservative investors, the cut in the bank's dividend that shareholders have seen has to be worrisome. Capital-raising suggests that further cuts could come at some point, despite a currently healthy payout ratio. However, with shares already down almost a quarter in the past year, bargain-seeking investors willing to take some risk might find the stock compelling.
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."