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 past several years have been remarkable for the auto industry. With two of the Big Three U.S. carmakers going bankrupt, Honda Motor (NYSE: HMC ) seems to have been in a prime position to take advantage. Yet with the earthquake and tsunami in Japan earlier this year, Honda has had problems of its own. What does the future hold for the Japanese carmaker? 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 Honda Motor.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$51.5 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||0.73||Pass|
|Worst loss in past five years no greater than 20%||(35.6%)||Fail|
|Valuation||Normalized P/E < 18||22.21||Fail|
|Dividends||Current yield > 2%||2.7%||Pass|
|5-year dividend growth > 10%||(5.6%)||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||47.1%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only four points, Honda Motor isn't giving conservative investors what they like to see in a stock. Honda's dividend yield is reasonable, but pressure from a strong yen and natural disasters combined to crush growth and leave shares trading at premium valuations.
Honda has a long-term reputation for quality and dependability. But for a while now, critics have questioned whether the company is still poised for success. Rather than dominating its peers on reliability, Japan's No. 2 automaker seems to be resting on its past achievements, giving once near-vanquished foes like Ford (NYSE: F ) a chance to survive.
Lately, unforeseen circumstances have hurt Honda. Like Toyota (NYSE: TM ) , Honda saw big disruptions in production after the Japanese disasters in March. More recently, flooding in Thailand has also put a wrench in getting the parts Honda needs to build cars.
The bigger concern, however, is lack of confidence in Honda's new product launches. With its new Civic failing to earn praise from Consumer Reports and other industry publications, Honda seems to be losing ground to Asian rivals Nissan and Hyundai. At the same time, in the all-important Chinese market, General Motors (NYSE: GM ) has gotten off to a huge head start, which will force Honda to play catch-up. Tata Motors (NYSE: TTM ) also represents an obstacle to growth in the Asian emerging markets.
For retirees and other conservative investors, Honda's big loss in share price since the March disaster shows that fragile automaker stocks aren't confined to U.S. borders. Until Honda can demonstrate that it has the will to start moving forward more aggressively in the ultra-competitive industry, it's not going to be a stock you want for 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.
Add Honda Motor to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
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."