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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.
Retirees have gotten burned by banks over the past several years. But one place where the financial sector has done relatively well is Canada. With a more favorable housing environment that never saw the immense leverage that the U.S. suffered through in the housing bust, Bank of Montreal (NYSE: BMO ) and some of its peers held up far better than their southern neighbors from a financial standpoint -- even if their shares also fell hard. Now, will Bank of Montreal take advantage of its more favorable condition? 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 Bank of Montreal.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$36.6 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||0.70||Pass|
|Worst loss in past five years no greater than 20%||(52.8%)||Fail|
|Valuation||Normalized P/E < 18||13.00||Pass|
|Dividends||Current yield > 2%||4.8%||Pass|
|5-year dividend growth > 10%||4.4%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||50.9%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, Bank of Montreal certainly gives conservative investors more of what they prefer from a stock than some of its American counterparts. The bank boasts a strong dividend that looks like what U.S. banks paid before the financial crisis, and the shares come at a reasonable valuation as well.
Interestingly, the next battleground for Bank of Montreal may be in the U.S. rather than Canada. Both it and competitor Toronto-Dominion (NYSE: TD ) have tried to expand southward to take advantage of weakness in their U.S. competitors. Toronto-Dominion bought Bank of America's (NYSE: BAC ) international credit card business, while Bank of Montreal bought up Marshall & Ilsley, helping give it exposure to asset management and institutional trust business in the U.S.
Meanwhile, Bank of Montreal is more attractive than peers Royal Bank of Canada (NYSE: RY ) and Bank of Nova Scotia (NYSE: BNS ) on valuation grounds. Bank of Montreal has a much lower price-to-book multiple than RBC, Scotiabank, or TD, and it also has the most generous dividend payout in terms of yield. That's offset somewhat by a slightly slower growth rate, but overall, Bank of Montreal seems like the bargain of the group.
That's the sort of pedigree that retirees and other conservative investors find appealing about a stock. With potential for dividend growth in the future, Bank of Montreal makes a perfectly good addition for retirement investors looking to beef up their exposure to the financial sector globally.
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."