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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
The world is a dirty place, and someone has to clean it up. Starting here in the U.S. but with the potential to expand rapidly to reach a global scope, Ecolab (NYSE: ECL ) has an opportunity to make the world a better, cleaner place with its products. Below, we'll look at how Ecolab does on our 10-point scale.
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 Ecolab.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$12.4 billion||Pass|
|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||4 years||Pass|
|Stock stability||Beta < 0.9||0.69||Pass|
|Worst loss in past five years no greater than 20%||(30.5%)||Fail|
|Valuation||Normalized P/E < 18||25.48||Fail|
|Dividends||Current yield > 2%||1.3%||Fail|
|5-year dividend growth > 10%||11.9%||Pass|
|Streak of dividend increases >= 10 years||19 years||Pass|
|Payout ratio < 75%||29.2%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With seven points, Ecolab gives conservative investors much of what they like to see in a stock. The company isn't well-known, but it's in an industry with huge growth potential.
Ecolab makes cleaning and sanitizing products largely for commercial use both in the U.S. and in 72 countries around the world. It also produces water filters, and it competes with Rollins (NYSE: ROL ) in providing pest control services to the U.S. market.
A few months ago, Ecolab agreed to buy out Nalco Holdings (NYSE: NLC ) for $5.4 billion. The combination should allow Ecolab to build its water management business, which the company counts among its leading long-term growth initiatives. CEO Douglas Baker believes that with water growing increasingly scarce by 2025, the acquisition will boost Ecolab's expansion efforts.
There's no doubt that Ecolab has plenty of opportunity to clean up the world. In India, for instance, Veolia Environnement (NYSE: VE ) and Danaher (NYSE: DHR ) have done some work in water sanitation, but plenty remains to be done. The story in other emerging markets is similar, as increasing demand for infrastructure improvements threatens to outpace capacity.
Retirees and other conservative investors may not be all that impressed with a stock paying just over 1% in dividends and carrying a relatively high earnings multiple. But for those willing to make a play on what's undeniably a growth industry in the decades to come, Ecolab would make a reasonable addition to a 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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