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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 International Paper (NYSE: IP ) 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 International Paper.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10.1 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||2.20||Fail|
|Worst loss in past five years no greater than 20%||(61.8%)||Fail|
|Valuation||Normalized P/E < 18||8.62||Pass|
|Dividends||Current yield > 2%||4.6%||Pass|
|5-year dividend growth > 10%||(6.9%)||Fail|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||23.9%||Pass|
|Total score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, International Paper rolls out part of what conservative investors like to see in a stock, but it isn't a perfect fit. A healthy dividend and attractive valuation are points in its favor, but the stock has been extremely volatile in recent years.
International Paper makes a variety of paper products, ranging from copier paper and packaging materials to paper towels and plates. After a long rough patch, industry conditions have improved lately, with International Paper and MeadWestvaco (NYSE: MWV ) seeing strong year-over-year jumps in profits. Fellow competitor Boise (NYSE: BZ ) has also seen profitability rise over the past two years.
Nevertheless, the industry is competitive, and consolidation has become an important trend. Earlier this year, RockTenn (NYSE: RKT ) bought fellow packager Smurfit-Stone. In an attempt to compete more efficiently, International Paper made a bid for shipping-box maker Temple-Inland (NYSE: TIN ) earlier this year. After a series of back and forth moves, the companies finally agreed to the combination, which could bring synergy advantages worth $300 million annually by 2013. Some investors, including value investor Prem Watsa, thinks that AbitibiBowater (NYSE: ABH ) could be the next acquisition target.
For retirees and other conservative investors, the real sticking point may be the company's dividend, which International Paper cut by 90% at the worst of the financial crisis two years ago. Since then, the company has pushed its most recent quarterly payouts above its pre-crisis level, and if that trend continues, then it should make shareholders happy. Still, the stock's major volatility makes it clear that you need to have a tolerance for risk to include International Paper in your 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."