Recs

0

Is Infosys the Right Stock to Retire With?

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.

Factor

What We Want to See

Actual

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.

Keep searching
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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of IBM. Motley Fool newsletter services have recommended buying shares of Accenture and Dell. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1592717, ~/Articles/ArticleHandler.aspx, 4/20/2014 5:29:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 2 days ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 4:00 PM
INFY $52.88 Up +0.30 +0.57%
Infosys Technologi… CAPS Rating: ****
ACN $78.90 Down -0.21 -0.27%
Accenture CAPS Rating: *****
CTSH $49.55 Down -0.23 -0.46%
Cognizant Technolo… CAPS Rating: ****
DELL $0.00 Down +0.00 +0.00%
Dell CAPS Rating: *
IBM $190.01 Down -6.39 -3.25%
International Busi… CAPS Rating: ****
WIT $13.61 Down -0.10 -0.73%
Wipro Limited (ADR… CAPS Rating: ***

Special Offer for Savvy Investors Like You!

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut semper dui vitae molestie venenatis. Suspendisse.

Enter Email Address:



Privacy / Legal Information
Advertisement