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.
Big Wall Street banks have gotten plenty of bad press over the past several years. But from its vantage point in Minneapolis, US Bancorp (NYSE: USB ) has walked the fine line between retaining its regional roots and expanding in a healthy way. Does US Bancorp deserve scorn as a Wall Street wannabe or praise for standing apart? Below, we'll look at how the company 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 US Bancorp.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$47.9 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||4 years||Pass|
|Stock stability||Beta < 0.9||0.99||Fail|
|Worst loss in past five years no greater than 20%||(16.6%)||Pass|
|Valuation||Normalized P/E < 18||12.90||Pass|
|Dividends||Current yield > 2%||2%||Pass|
|5-year dividend growth > 10%||(20.3%)||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||44.8%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, US Bancorp hasn't given conservative investors everything they wanted from a stock. But with a great deal more share stability than some of its counterparts and a dividend that's recovered part of its losses from the financial crisis, the bank distinguishes itself in its industry.
Obviously, the mortgage meltdown still remains a vivid memory for most bank investors, as losses devastated the entire industry. But in the colorful words of Charlie Munger, Wells Fargo (NYSE: WFC ) and US Bancorp "avoid stupidity better than most." Moreover, unlike companies like Morgan Stanley (NYSE: MS ) and Goldman Sachs (NYSE: GS ) that have substantial investment banking operations, US Bancorp's pure traditional banking approach lends itself to less volatility.
Investors are clearly more comfortable with US Bancorp's asset quality. With a price-to-book ratio of 1.6, US Bancorp carries a much higher valuation than Bank of America (NYSE: BAC ) and Citigroup (NYSE: C ) -- suggesting that US Bancorp may avoid having to take more asset writedowns or losses than the latter two banks may need to take.
For retirees and conservative investors, the recent 150% increase in US Bancorp's dividend is a positive step, although the payout still lags well behind pre-crisis levels. If you're looking to tiptoe back into financials, then US Bancorp is one of the best-suited banks for 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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