The site will be unavailable in 30 minutes for scheduled maintenance.

Recs

1

Will ACE Help You Retire Rich?

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.

ACE Limited (NYSE: ACE  ) isn't the first name that comes to mind when you think about insurance companies. But the insurer sells a full range of products, including life insurance, property and casualty coverage, and reinsurance to peer insurance companies. With 2011 having been a tough year for insurers, though, no one in the industry has emerged unscathed. Can ACE recover? Below, we'll revisit how ACE 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 ACE.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $24.7 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 0.75 Pass
  Worst loss in past five years no greater than 20% (13.0%) Pass
Valuation Normalized P/E < 18 19.00 Fail
Dividends Current yield > 2% 2.7% Pass
  5-year dividend growth > 10% 8.9% Fail
  Streak of dividend increases >= 10 years 20 years Pass
  Payout ratio < 75% 29.0% Pass
       
  Total score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at ACE last year, the company has dropped a point. Weaker earnings pulled the company's P/E ratio up sharply, calling its valuation into doubt.

2011 wasn't kind even to well-known insurance companies. Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) suffered through a lackluster year, taking hits from providing catastrophe reinsurance and having to deal with disasters in both Japan and several parts of the U.S., culminating in Hurricane Irene's march up the Atlantic coast. Other insurers, including Allstate (NYSE: ALL  ) and Travelers, saw similarly bad losses last year, with Allstate's second-quarter catastrophe losses topping the $2 billion mark.

But ACE hasn't let last year's woes stop it in its tracks. The company has remained solidly profitable throughout, unlike Montpelier Re (NYSE: MRH  ) , which ended up suffering a big loss in 2011 in the wake of big policy payouts. Even better, ACE raised its dividend by more than a third in January, keeping up a two-decade streak of payout gains. Yet even with last year's relative earnings weakness, the company still pays out less than 30% of its earnings in dividends, leaving plenty of room for further boosts.

For retirees and other conservative investors, ACE's ability to stay solid even during times of trouble bodes well for its future. Often, strong insurance companies benefit from tough years, as they drive weaker competitors out of business. ACE should be well-placed to profit from a tighter reinsurance market going forward, and that makes it attractive, even at a somewhat inflated valuation.

Keep searching
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.

Add ACE Limited to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Montpelier Re. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1861495, ~/Articles/ArticleHandler.aspx, 8/1/2014 9:29:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 13 minutes ago Sponsored by:
DOW 16,493.37 -69.93 -0.42%
S&P 500 1,925.15 -5.52 -0.29%
NASD 4,352.64 -17.13 -0.39%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/1/2014 4:00 PM
ACE $100.21 Up +0.11 +0.11%
ACE Limited CAPS Rating: ****
ALL $58.14 Down -0.31 -0.53%
The Allstate Corp CAPS Rating: ***
BRK-A $189279.00 Up +1155.00 +0.61%
Berkshire Hathaway… CAPS Rating: ****
BRK-B $125.83 Up +0.40 +0.32%
Berkshire Hathaway CAPS Rating: *****
MRH $29.58 Up +0.05 +0.17%
Montpelier Re Hold… CAPS Rating: *****

Advertisement