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.
Most investors have strong opinions about tobacco stocks. Some see them as "sin" stocks whose businesses aren't consistent with their ethics. Yet others point to the strong gains and healthy dividends that companies like tobacco giant Altria (NYSE: MO ) have generated for decades. Is Altria a smart way to play the world's tobacco habit, or are its days numbered? 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 Altria.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$59.0 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||2 years*||Fail|
|Stock stability||Beta < 0.9||0.39||Pass|
|Worst loss in past five years no greater than 20%||(27.0%)||Fail|
|Valuation||Normalized P/E < 18||15.34||Pass|
|Dividends||Current yield > 2%||5.8%||Pass|
|5-year dividend growth > 10%||11.2%**||Pass|
|Streak of dividend increases >= 10 years||43 years*||Pass|
|Payout ratio < 75%||91.3%||Fail|
|Total score||7 out of 10|
Source: S&P Capital IQ. * Reflects adjustments to reflect spun-off businesses. ** Dividend growth since first dividend after Philip Morris spinoff in 2008. Total score = number of passes.
With seven points, Altria gives conservative investors much of what they like to see in a stock. The company has gone through some massive changes in the past decade, but despite challenges, it looks poised to continue its long-term winning ways.
More than most stocks, Altria has gone through major upheaval in recent years. Having spun off its Kraft Foods (NYSE: KFT ) unit as well as the international tobacco business that now resides within Philip Morris International (NYSE: PM ) , what remains is a pure play on the U.S. cigarette and tobacco business.
But Altria isn't just any cigarette-maker. It dominates rivals Reynolds American (NYSE: RAI ) , Lorillard (NYSE: LO ) , and Vector Group (NYSE: VGR ) in market share, commanding around half of the U.S. market thanks to its popular brands like Marlboro. That share helps it create huge amounts of cash flow, most of which it earmarks solely for shareholder dividends.
Of course, litigation is a constant threat for Altria, and with state governments cash-poor at the moment, raising cigarette taxes is a real possibility. But recently, the industry got a favorable ruling from a U.S. District Court judge, who temporarily blocked a new requirement for tobacco companies to put graphic warning labels on their cigarette packages.
Retirees and conservative investors need to weigh the solid past of Altria against the possibility of future disruptions to its business. Looking back, though, the company has thus far gotten through serious challenges to its business model mostly unscathed. If you think it will continue to do so, then Altria would make a reasonable addition to 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.
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