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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.
Through good times and bad, the one thing you can count on is that people will keep creating garbage. Republic Services (NYSE: RSG ) has found a way to turn other people's trash into treasure, with recycling and waste-removal services across the nation. But with its larger rival and a host of other players in this growing industry, does Republic Services have what it takes to hold its own? Below, we'll revisit how Republic Services 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 Republic Services.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$11.4 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||0.82||Pass|
|Worst loss in past five years no greater than 20%||(18.9%)||Pass|
|Valuation||Normalized P/E < 18||16.17||Pass|
|Dividends||Current yield > 2%||2.9%||Pass|
|5-year dividend growth > 10%||16%||Pass|
|Streak of dividend increases >= 10 years||9 years||Fail|
|Payout ratio < 75%||52.5%||Pass|
|Total score||9 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Republic Services last year, the company has picked up a point. If it can hold its own and go another year with a dividend increase, Republic is poised to make it a perfect 10.
When people think of trash, they usually think of Republic rival Waste Management (NYSE: WM ) . As the largest player in recycling and trash collecton in the U.S., Waste Management sports a higher dividend yield than Republic. But what Republic offers is greater consistency in growth, as well as somewhat faster dividend growth than Waste Management. Moreover, both companies stand well above smaller competitors Progressive Waste (NYSE: BIN ) and Waste Connections (NYSE: WCN ) , with Waste Connections sporting a weak dividend yield and Progressive Waste suffering from losses recently. Economies of scale are definitely helpful in the business, and until Waste Connections and Progressive Waste get bigger, they'll face challenges that Republic has already surmounted.
The industry has undergone tough conditions lately, with municipal governments looking to cut back on costs like trash collection. Those conditions have arguably been the worst for Republic, as its Sunbelt focus on cities like Las Vegas has left it exposed to some of the hardest-hit areas of the U.S. economy.
But one area that's been left almost untouched by Waste Management and Republic so far is the lucrative international market. Veolia Environnement (NYSE: VE ) has worldwide scope, but it extended itself too far and has been regrouping recently, leaving room for the U.S. players to try expanding if they want.
For retirees and other conservative investors, the fact that insiders are buying Republic shares is a good sign of the company's strength. With a healthy and growing yield, Republic should stand to gain from continuing improvement in the U.S. and global economy -- and could reach a perfect 10 next year if it can succeed.
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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