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.
Amid millions of job losses during the last recession, outsourcing to foreign countries has gotten a terrible reputation. Yet the savings in labor costs can be staggering. That trend is a primary reason for the success of Indian tech giant Infosys Technologies (Nasdaq: INFY ) . Despite the scorn of average Americans, is Infosys a good investment? 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 Infosys.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$30.6 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||4 years||Pass|
|Stock stability||Beta < 0.9||0.53||Pass|
|Worst loss in past five years no greater than 20%||(47.7%)||Fail|
|Valuation||Normalized P/E < 18||23.10||Fail|
|Dividends||Current yield > 2%||1.3%||Fail|
|5-year dividend growth > 10%||86.2%||Pass|
|Streak of dividend increases >= 10 years||15 years||Pass|
|Payout ratio < 75%||23.9%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With seven points, Infosys gives conservative investors quite a bit of what they like to see in a stock. Although emerging-market shares have been volatile lately, the company comes with a good track record for dividends -- albeit at a somewhat pricey valuation at the moment.
Infosys competes in the IT outsourcing arena, getting more than 70% of its total revenue from the U.S. and Europe. With its global presence, the company goes up against not only fellow Indian rivals Wipro (NYSE: WIT ) and Tata Consultancy but also international behemoths IBM (NYSE: IBM ) and Accenture (NYSE: ACN ) . Yet with Indian labor costs quite a bit lower than those elsewhere in the world, Infosys can compete very well against IBM and Accenture on a price basis, which remains most important for many customers.
As its most recent quarter supports, Infosys has seen substantial growth in revenue and earnings recently. But it can't afford to rest on its laurels. Cognizant Technology (Nasdaq: CTSH ) has enjoyed faster growth in sales and income over the past five years, and analysts see that trend continuing for the next five years as well. That may help explain why Cognizant's shares have performed somewhat better than Infosys over the past year.
One threat to Infosys may lie in video support, which could displace the call centers that the company and its peers are infamous for. But even with Dell (Nasdaq: DELL ) dropping trial balloons of a video-based support concept, it's unclear whether customers would want it.
For retirees and other conservative investors, an emerging-market tech stock may seem risky, and recent history bears out those concerns. But if you have some tolerance for risk, growth in the Indian economy could help Infosys stay on track to deliver solid returns for the foreseeable future.
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 Infosys 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."