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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.
There's never a shortage of news in the world. But the companies that report the news, including Thomson Reuters (NYSE: TRI ) , have gone through the challenge of an ever-changing technological world that has transformed their industry in the past decade. Will Thomson Reuters be able to adjust, or is it doomed to the obsolescence of some of its peers? 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 Thomson Reuters.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$21.7 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.37||Pass|
|Worst loss in past five years no greater than 20%||(28.9%)||Fail|
|Valuation||Normalized P/E < 18||19.47||Fail|
|Dividends||Current yield > 2%||4.7%||Pass|
|5-year dividend growth > 10%||7.2%||Fail|
|Streak of dividend increases >= 10 years||18 years||Pass|
|Payout ratio < 75%||65.3%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of six, Thomson Reuters has some but not all of the traits that conservative investors like to see in a stock. More than some other news-oriented companies, Thomson Reuters has managed to sustain decent growth, although it carries a valuation that reflects that advantage.
Thomson Reuters is best-known for the information services it provides, as millions of investors count on its ubiquitous stories about financial and business news. But the company goes beyond that, providing vital subscription-based databases for the legal, accounting, and health-care science fields, competing with companies including Bloomberg, FactSet Research (NYSE: FDS ) , and the Dow Jones unit of News Corp. (Nasdaq: NWS ) . In addition, it's the company behind Lipper, which competes with Morningstar (Nasdaq: MORN ) in providing mutual fund information to investors.
Obviously, with its digital presence already well-established, Thomson Reuters has an advantage over newspaper publishers like New York Times Co. (NYSE: NYT ) , Gannett (NYSE: GCI ) , and McClatchy (NYSE: MNI ) , which have struggled this year on weaker advertising revenue and huge exposure to the costs of printing newspapers.
But Thomson Reuters has its own obstacles to overcome. It's going through an internal reorganization to merge its professional and markets segments, and the benefits from that combination have come more slowly than some investors would like.
For retirees and other conservative investors, what's perhaps most troubling about Thomson Reuters is the substantial decline in share price that the stock has suffered this year. But with a strong dividend and an ongoing commitment to increase payouts to shareholders over time, Thomson Reuters may well be worth the risk for investors seeking exposure to media and publishing.
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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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."