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.
Farming may not seem like a very interesting place to invest your money. But lately, the agriculture industry has been red hot, and farm equipment maker Deere (NYSE: DE ) looks to be well-positioned to take advantage of farmers with money to spend. But given how volatile crop prices are, can investors count on Deere's up-phase lasting for the long haul? Below, we'll revisit how Deere 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 Deere.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$30.7 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||1.53||Fail|
|Worst loss in past five years no greater than 20%||(58.1%)||Fail|
|Valuation||Normalized P/E < 18||11.90||Pass|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||15.9%||Pass|
|Streak of dividend increases >= 10 years||9 years||Fail|
|Payout ratio < 75%||21.9%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Deere last year, the company has picked up a point. A boost in dividend yield gets the stock above the 2% yield level, but its share price has still seen a drop even in a favorable environment.
Deere has seen strength throughout the world. In the U.S., a mild winter encouraged early planting, which helped support farming equipment purchases. Both Deere and fertilizer maker DuPont (NYSE: DD ) have opened new factories in the farm-intensive state of Iowa to cash in on demand.
But what Deere's doing in emerging markets is even more impressive. In Brazil, the company has gone beyond its agricultural focus to go up against crane-manufacturer Manitowoc (NYSE: MTW ) as well as Terex (NYSE: TEX ) in the broader construction market. With two construction factories pegged to open late next year, Deere should be in position to benefit from the 2014 World Cup and 2016 Olympics in Brazil. The company is also expanding strongly in India and China.
Deere delivered strong results in its most recent quarter, posting double-digit growth in agriculture and turf equipment sales despite somewhat lower prices for crops. With AGCO (NYSE: AGCO ) also expecting double-digit growth in full-year sales, it appears that the industry has more than enough growth for all its players.
For retirees and other conservative investors, Deere seems well-poised to keep thriving. Yet its stock has been extremely volatile, so you'll want to be sure you have nerves of steel if you add Deere to your retirement portfolio.
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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