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.
Financial stocks around the world have been under assault in recent years. The financial meltdown made the whole world leery of relying too much on U.S. banks, and the sovereign debt crisis has in turn pressured Europe's oldest financial institutions as well. But by comparison, Bank of Nova Scotia (NYSE: BNS ) and its Canadian banking peers have held up quite well, thanks to a resilient housing market and strong markets in natural resources. But can Canada keep it together forever, or will it too have to go through its own version of a banking crisis? Below, we'll revisit how Bank of Nova Scotia 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 Bank of Nova Scotia.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$62.7 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.77||Pass|
|Worst loss in past five years no greater than 20%||(45.0%)||Fail|
|Valuation||Normalized P/E < 18||13.54||Pass|
|Dividends||Current yield > 2%||4.1%||Pass|
|5-year dividend growth > 10%||5.9%||Fail|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||46.1%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Bank of Nova Scotia last year, the company has kept its six-point score. The shares haven't held up as well as conservative investors would like, but the Canadian bank still has most of the favorable traits that made it attractive last year.
For those who feel like they got burned by financials, Bank of Nova Scotia and its fellow Canadian banks offer the protection that you may feel is missing from U.S. banks. With tighter regulation and a system that encourages shorter-term mortgages that homeowners pay off faster, banks don't carry as much risk as their American counterparts.
One challenge for Scotia comes from its peers seeking to expand southward. Both Toronto-Dominion (NYSE: TD ) and Bank of Montreal (NYSE: BMO ) have moved into the U.S. market to take advantage of weakness south of the border, leaving rival Royal Bank of Canada (NYSE: RY ) in the dubious position of going in the wrong direction by exiting the U.S. retail banking market last year.
Bank of Nova Scotia doesn't seem to have expansion plans for the U.S., but it is looking at South America. In the past two years, the company has taken over banks in Brazil, Uruguay, Chile, and Colombia. Just as Spain's Banco Santander (NYSE: STD ) has boosted its overall profits with its forays into Brazil and Chile, the growth opportunities throughout South America could help Scotiabank improve growth and expand its global reach.
For retirees and other conservative investors, the relative safety that Bank of Nova Scotia offers, combined with attractive dividend yields, make for a low-risk investment. Although a future financial crisis could take shares down -- like in 2008 -- Scotiabank makes for a reasonable play on a healthy financial stock.
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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