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.
In the cutthroat world of retail, you might not think of your corner drugstore as being a particularly strong investment. But Walgreen (NYSE: WAG ) has done a superb job of turning its almost omnipresent reach within the U.S. into profit. Still, with competitive pressures mounting, can Walgreen keep up its pace? Below, we'll revisit how Walgreen 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 Walgreen.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$30.8 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.95||Fail|
|Worst loss in past five years no greater than 20%||(34.4%)||Fail|
|Valuation||Normalized P/E < 18||13.15||Pass|
|Dividends||Current yield > 2%||2.5%||Pass|
|5-year dividend growth > 10%||23.4%||Pass|
|Streak of dividend increases >= 10 years||36 years||Pass|
|Payout ratio < 75%||27.2%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Walgreen last year, the company has kept its seven-point score. But much has happened in the past year to make the business environment much more fiercely competitive for Walgreen.
Walgreen has had substantial success with its retail business model. Over the years, the company has grown consistently, greatly outpacing competitor Rite Aid (NYSE: RAD ) , which has struggled with losses for years. In fact, some believe that Walgreen may now be looking to buy out Rite Aid, which could help create a new revenue-growth opportunity.
Sales growth is important because of the controversial decision that Walgreen made in leaving the Express Scripts (Nasdaq: ESRX ) network. That move away from the pharmacy benefits manager was responsible for a big part of Walgreen's 6.1% drop in prescriptions filled last quarter. It has also given rival CVS Caremark (NYSE: CVS ) a huge opportunity to poach customers from the Express Scripts network, which could change the balance of power in the industry.
Still, despite its woes, Walgreen shares look pretty attractive. At a very reasonable earnings multiple and with an excellent track record of annual dividend increases going back to the 1970s, Walgreen doesn't appear to be in any danger of losing investor confidence -- even with a pretty big drop in share price over the past year.
For retirees and other conservative investors, the big question is whether you believe Walgreen can go beyond simply being the neighborhood pharmacy to find new growth opportunities. With its financial strength and long history of success, Walgreen should have every ability to get through its challenges and come out stronger than ever -- as long as it can come up with a viable strategy and then execute on it.
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 Walgreen to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.