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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.
Few industries are more competitive than apparel and footwear. With various brands going in and out of style in next to no time, it's hard to stay on top of the latest trends. But VF Corp. (NYSE: VFC ) has spent a great deal of money to keep pace with the competition. Will its latest acquisition prove to be a winning move or a hindrance going forward? 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 VF.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$15.1 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||0.93||Fail|
|Worst loss in past five years no greater than 20%||(17.5%)||Pass|
|Valuation||Normalized P/E < 18||21.60||Fail|
|Dividends||Current yield > 2%||2.1%||Pass|
|5-year dividend growth > 10%||8.4%||Fail|
|Streak of dividend increases >= 10 years||39 years||Pass|
|Payout ratio < 75%||40.1%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With seven points, VF makes conservative investors feel quite comfortable with its stock. Shares don't come cheap at the moment, but nearly four decades of dividend growth prove that VF has managed to outlast a huge number of its less fashion-conscious rivals.
VF is the company behind all sorts of well-known brands. In footwear, its Vans brand goes up against companies such as Skechers (NYSE: SKX ) and Crocs (Nasdaq: CROX ) . VF also has the Wrangler and Lee denim brands, along with the more upscale Nautica line that offers underwear that goes up against Under Armour (NYSE: UA ) -- as well as handbags like Coach (NYSE: COH ) , albeit at a slightly lower price point.
Earlier this year, VF made a huge move: It bought out Timberland, a boot company with a serious commitment to socially responsible practices. The move cost VF about $1.8 billion but bolsters its outdoor orientation significantly, complementing its North Face brand and stepping up its game against competitors Deckers Outdoor (Nasdaq: DECK ) and Columbia Sportswear (Nasdaq: COLM ) .
For retirees and other conservative investors, though, the longer-term picture is more important. Its 2% yield isn't all that special, but its 39-year track record of dividend boosts is -- and the dividend got a bigger than normal boost this past quarter, jumping 14%. Although paying 22 times trailing earnings may seem pricey, if Timberland ends up boosting those earnings in the long run, then shares right now may be a bargain pickup for 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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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."