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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.
MetLife (NYSE: MET ) is one of the best regarded insurance companies in the country. But insurance companies overall have had a lousy experience recently. Natural disasters have hit property and casualty insurers hard, while low interest rates and unreliable investing returns have hurt life insurers and other products. Can MetLife get past this challenging environment and thrive? Below, we'll take a look at how MetLife 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 MetLife.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$41.8 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||1.94||Fail|
|Worst loss in past five years no greater than 20%||(42.2%)||Fail|
|Valuation||Normalized P/E < 18||6.46||Pass|
|Dividends||Current yield > 2%||1.9%||Fail|
|5-year dividend growth > 10%||4.6%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||13%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With five points, MetLife gives conservative investors some but by no means all of the traits that they prefer in a stock. The insurance company finds itself on perilous ground with the Federal Reserve, suggesting that the company will have to raise more capital to make regulators happy.
MetLife offers customers a wide range of insurance products, ranging from various types of life insurance to annuities and employee benefits. But MetLife also goes beyond insurance, with a bank subsidiary that it's in the process of selling to General Electric's (NYSE: GE ) GE Capital and one of the largest reverse-mortgage lenders left in the industry. The company has a big presence not just in the U.S. but also internationally, especially in Japan.
That Japanese exposure hurt MetLife and some of its peers after the Japanese earthquake last spring. Aflac (NYSE: AFL ) , which also does a lot of business in Japan, suffered from health-care claims. MetLife also had to pay some property-damage claims, yet overall, the event didn't keep MetLife from posting impressive profits in 2011.
Of much greater concern is yesterday's revelation that MetLife failed the Federal Reserve's latest round of stress tests. While Citigroup (NYSE: C ) and SunTrust (NYSE: STI ) both failed because of inadequate capital ratios, MetLife's failure came from missing on total risk-based capital. CEO Steve Kandarian said he couldn't figure out how the company failed the Fed's test, noting that the tests seemed to be inappropriate for insurance companies, marking MetLife down for its corporate bond portfolio and its separate-account treatment of variable annuities. At least in Kandarian's eyes, Citi and SunTrust investors should be more worried about their capital shortfalls than MetLife shareholders.
For retirees and other conservative investors, MetLife's volatility over the past several years is not a positive. Yet while anyone considering MetLife should be tolerant of taking on some risk, the stocks' attractive current valuation makes it worth a closer look.
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.
If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
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