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 companies are so ubiquitous that their name becomes synonymous with the product they make or service they provide. As a pioneer in photocopying, Xerox (NYSE: XRX ) is one of those companies. But with business technology jumping ahead at a breakneck pace, has Xerox been able to keep up? 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 Xerox.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10.9 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||1.60||Fail|
|Worst loss in past five years no greater than 20%||(50%)||Fail|
|Valuation||Normalized P/E < 18||10.58||Pass|
|Dividends||Current yield > 2%||2.1%||Pass|
|5-year dividend growth > 10%||0%*||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||24.3%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Since reinitiating dividend in December 2007.
With only five points, Xerox hasn't managed to make a perfect copy of its past success. With fierce competition, the company no longer dominates its once-powerful niche.
Everyone knows Xerox for its copiers. But the company now makes a full suite of document equipment, including printers and digital printing presses. It also provides a range of document, business, and IT outsourcing services, with customers including Cisco Systems (Nasdaq: CSCO ) and MGM Resorts (NYSE: MGM ) as well as several government entities.
But even longtime industry leaders can suffer from competition. Despite attacks from struggling Eastman Kodak (NYSE: EK ) to build a strong presence in the printer business, Hewlett-Packard (NYSE: HPQ ) has managed to keep control of the industry. And despite Xerox trying to woo consumers with cheaper ink, its more expensive printers haven't been able to challenge HP thus far. Moreover, the company has faced higher costs that have pressured margins, although its cost-cutting measures have cushioned the blow thus far.
Xerox also has plenty of tricks up its sleeve. For instance, its image recognition technology helps automate processes that used to require human judgment. Moreover, with shares at very reasonable valuations, Whitney Tilson's T2 Partners added Xerox stock to its portfolio earlier this year.
For retirees and other conservative investors, Xerox's slow growth doesn't pose a huge concern. As long as the company can sustain its reasonable dividend, it should make a reasonable holding for retirement portfolios. But if Xerox drops behind its competition in the future, you shouldn't make the mistake of holding on to the shares too long.
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 Xerox 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."