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.
Campbell Soup (NYSE: CPB ) has a dominant brand in the niche grocery category of soup. It's always good to be top dog, but the challenge that the company faces is in trying to use its brand recognition to stretch into other types of food offerings. Lately, Campbell has managed to sustain very modest growth, but changes throughout the food industry pose constant competitive pressures. Can Campbell find a way to spread its influence beyond soup? Below, we'll revisit how Campbell Soup 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 Campbell Soup.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10.4 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.28||Pass|
|Worst loss in past five years no greater than 20%||(13.6%)||Pass|
|Valuation||Normalized P/E < 18||14.32||Pass|
|Dividends||Current yield > 2%||3.5%||Pass|
|5-year dividend growth > 10%||8.8%||Fail|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||49.9%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Campbell Soup last year, the company has kept its seven-point score. The shares have been largely flat, although modest growth has pushed the stock's earnings multiple down slightly.
Campbell has struggled recently from declines in its namesake soup business. Two factors have combined to make things difficult for Campbell: a drop in overall soup consumption industrywide, and strong competition from ConAgra's (NYSE: CAG ) Healthy Choice brand and General Mills' (NYSE: GIS ) Progresso. H.J. Heinz (NYSE: HNZ ) has also seen lower unit volume in its food-based business, as rising prices have made it hard to retain cash-strapped customers.
In response, Campbell is trying to bolster sales on two fronts. First, it wants to push international expansion, offering new products to consumers in Europe while boosting overall sales in Australia, New Zealand, and Canada. China is also a key component of its growth strategy. Yet at the same time, Campbell has launched 27 new products in the current fiscal year in an attempt to broaden its lineup and build on its brand awareness.
It's interesting how Campbell is moving counter-trend in trying to expand. Kraft (NYSE: KFT ) , by contrast, is splitting itself up into two parts to try to be more flexible with more focused businesses. Yet for Campbell, a more diversified lineup may be crucial to convince investors and consumers that the company sells more than just soup.
For retirees and other conservative investors, Campbell's 3.5% dividend yield is an attractive reason to stick with the low-volatility stock. If CEO Denise Morrison can keep its turnaround on track, then Campbell could easily see growth start perking back up in the years to come.
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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