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.
Exchange-traded funds have turned into a trillion-dollar business, and at the top of the industry, you'll find BlackRock (NYSE: BLK ) and its iShares line of ETFs. Yet despite the mass appeal of ETFs, the big question is this: Does the company that stands behind those ETFs make a better investment than the ETFs themselves? Below, we'll look at how BlackRock 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 BlackRock.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$33.5 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||1.50||Fail|
|Worst loss in past five years no greater than 20%||(37.0%)||Fail|
|Valuation||Normalized P/E < 18||17.66||Pass|
|Dividends||Current yield > 2%||2.9%||Pass|
|5-year dividend growth > 10%||26.8%||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||44.5%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, BlackRock doesn't have everything a conservative investor would like to see in a stock. Although the company's dividend trajectory looks promising, the stock's history shows the volatility of the past several years.
The ETF industry has seen plenty of turmoil in recent years, with assets under management climbing well above the $1 trillion mark and the number of available ETFs growing quickly. Yet BlackRock stands above the fray as the largest ETF provider, beating out State Street (NYSE: STT ) and Vanguard as top dog in the industry. It also has its share of active asset management business.
But the company has faced challenges. In its most recent quarterly report last week, the company announced a 16% drop in fourth-quarter net income from the year-ago period, with assets under management down slightly to $3.51 trillion. Revenue dropped 11% due to lower fees from money management as well as a decline in the amount of investment advisory work done.
The benefits of having iShares under BlackRock's roof is that the company doesn't have to panic when money leaves actively managed funds in favor of ETFs. But competition in ETFs will only get more fierce, as discount brokers TD AMERITRADE (Nasdaq: AMTD ) , Schwab (NYSE: SCHW ) , and E*TRADE Financial (Nasdaq: ETFC ) vie for supremacy in deals to offer commission-free ETF trading to their respective clients. Already, Schwab has amassed billions in its proprietary ETFs, while E*TRADE has gone with ETFs from competitors WisdomTree and Global X and TD AMERITRADE offers a wide array of funds that include some iShares offerings.
For retirees and other conservative investors, a dividend yield of nearly 3% looks awfully attractive. But as cost becomes an even greater concern for ETF investors, profits may start coming down for BlackRock -- and that could put a lid on its potential gains.
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.
BlackRock's ETFs may help you in your retirement planning, but we've got some individual stocks you should take a look at. Read all about them in The Motley Fool's latest special report, which gives all the details on three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
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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."