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Is Apple the Right Stock to Retire With?

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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.

It's hard to think of a company that has made a larger impact on the world of technology than Apple (Nasdaq: AAPL  ) over the past decade. With the revolutionary iPod taking portable music to a higher level, the Cupertino giant tapped into a huge market, and its iPhone has become a huge force in the mobile world. Yet for all that Apple has done to help put many early shareholders into a position where they could retire, the question remains: Is it a good stock for conservative investors to buy today? Let's 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 Apple.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $349.6 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 5 years Pass
Stock stability Beta < 0.9 1.22 Fail
  Worst loss in past five years no greater than 20% (56.9%) Fail
Valuation Normalized P/E < 18 16.53 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Streak of dividend increases >= 10 years NM NM
  Payout ratio < 75% NM NM
       
  Total score   4 out of 8

Source: S&P Capital IQ. NM = not meaningful; Apple pays no dividend. Total score = number of passes.

With 4 points, Apple reveals a huge shortcoming that conservative investors will definitely pick up on: its lack of a dividend. Some would disagree with the huge impact that has on our 10-point scale, but with other tech giants finally getting on the dividend bandwagon, Apple could remedy the situation quite easily with its huge cash hoard.

Apple stands out as one of the top growth stocks of the past 10 years. The company managed to sustain sales and free cash flow growth even during the recession, thanks to its string of innovations. Routinely, dozens of suppliers, including camera-sensor maker OmniVision Technologies (Nasdaq: OVTI  ) and power-amplifier chip producer TriQuint Semiconductor (Nasdaq: TQNT  ) , rise or fall with the health of Apple's business.

More than anything else, the iPhone is behind this explosion in profitability. Because of subsidies from carriers AT&T (NYSE: T  ) , Verizon, and now Sprint Nextel (NYSE: S  ) , customers pay much less than the roughly $600 that Apple gets for every iPhone sale. The newer iPad has obviously provided a big boost as well.

But for the first time in years, Apple missed earnings estimates in the third quarter. Many blamed short-term delays that arguably shouldn't repeat, but others point to Amazon.com's (Nasdaq: AMZN  ) Kindle Fire and other competitors as threats not just to iPad hardware sales but also to the media-distribution business on which Apple's iTunes long had an almost monopolistic stranglehold.

The one criticism that at least a few Apple investors have had is that the company has built a huge bundle of cash that sits on its balance sheet. Even longtime holdouts Cisco (Nasdaq: CSCO  ) and Oracle finally caved in and started paying dividends in recent years, but Apple has continued to resist. Some believe that new CEO Tim Cook may finally start the dividend that former CEO Steve Jobs never did. If that happens, then Apple's score here could skyrocket overnight.

Without the dividend, retirees and conservative investors have to weigh the company's undeniable growth prospects and extremely attractive valuation with its share-price volatility. If you don't depend on income from your retirement portfolio, then Apple could be a good buy despite its relatively poor score on this scale.

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 Apple 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 TriQuint Semiconductor, Oracle, Cisco, and Apple, as well as a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Apple, Cisco, and Amazon.com, as well as creating a bull call spread position on Apple. We Fools don't 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 (5) | Recommend This Article (4)

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.

  • Report this Comment On November 29, 2011, at 6:34 PM, beetlebug62 wrote:

    "Worst loss in past five years no greater than 20%"

    What is that? Apple hasn't had a loss in the last 5 fiscal years.

    As for >2% dividends, a retiree can easily replicate that by selling shares.

  • Report this Comment On November 29, 2011, at 7:29 PM, Stonesand wrote:

    The lack of a dividend is lost on many young investors who can't understand why Apple's stock has not done better than it has. The lack of a dividend eliminates a large group of investors who look for a dividend while they wait for better economic times.

    Secondly, the technology world abounds with stocks that have not done very well over the years, in part, due to changing technologies. Apple needs to be mindful of its competitors and the gains they are making in the tablet market as well as the smartphone market.

    Disclosure, I have been a Mac user since 1984, I have a few shares of Apple and I admire the company but the lack of dividend will mean I will continue to have only a few share, get the picture?

  • Report this Comment On November 29, 2011, at 7:41 PM, 1984macman wrote:

    @ beetlebug62, clearly this refers to the drop in Apple's stock value during the huge drop in all stocks in the depths of the Great Depression. And that shows just how disingenuous this analysis is.

    And as regards dividends, who cares about dividends when the stock value keeps increasing? Would you rather have a 3% stock dividend or a 30% increase in stock value?

  • Report this Comment On November 29, 2011, at 10:52 PM, mnosense wrote:

    Apple will soon lose its competition to Google on mobile devices. It does not learn from its past failure taht caused the near BK, only because Bill Gates gave Apple the cash to save it.

    Have you discovered Apple computers gained some markets after it quietly cloned them to be PC alike?

    Dude, you keep making foolish statement only to prove this site hosts bunch of true fools.

  • Report this Comment On November 29, 2011, at 11:20 PM, stanbaran wrote:

    Thanks, mnosense. I always enjoy reading comments that are totally unencumbered by the burden of having any relation to the facts. And as for your prediction, I'd love to see you put your money where your mouth is. I could use the free cash.

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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.

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