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.
Peter Lynch once said that when it comes to investing, you should buy what you know. One thing many people know very well is food, and breakfast cereals like Post and Grape Nuts are what people know best about Ralcorp Holdings
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 Ralcorp Holdings.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$4.69 billion||Fail|
|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||3 years||Fail|
|Stock stability||Beta < 0.9||0.31||Pass|
|Worst loss in past five years no greater than 20%||(3.9%)||Pass|
|Valuation||Normalized P/E < 18||17.97||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; Ralcorp doesn't pay a dividend. Total score = number of passes.
With a score of four, Ralcorp falls well short of what many conservative investors want from their stocks. In particular, the company's lack of a dividend hurts it on this scale, although after a coming strategic spinoff, the component parts might well look more attractive in the long run.
The food industry has faced some challenging conditions lately. With food inflation having run rampant in recent years, many companies have struggled. The potential cost savings from consolidation in the industry was likely one reason why ConAgra
But Ralcorp wasn't interested in the buyout bid. Instead, it decided to spin off its Post cereal segment in an attempt to unlock shareholder value. Interestingly, Ralcorp had only bought Post from Kraft
But that doesn't mean that Ralcorp is standing still. After buying the private-brand refrigerated dough business from Sara Lee late last year, Ralcorp seems content to use its dominance behind the scenes to produce profits rather than trying to support high-profile brands of its own. At least based on the current competitive environment, that seems like a smart move.
Retirees and other conservative investors who are willing to own a stock that doesn't pay a dividend may prefer to wait until after the Post spinoff to grab shares of Ralcorp. If they're lucky, other investors may dump their Ralcorp shares to bet on Post's higher-profile success. That could be just the move that value-seeking investors are waiting for.
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 ."