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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.
When average consumers think of software companies, Oracle (Nasdaq: ORCL ) isn't typically the first name that comes to mind. That's because unlike some of its more consumer-focused competitors, Oracle caters more toward businesses and developers. Yet in recent years, Oracle has expanded into hardware to bolster its growth. With competitors on all sides, however, is the software giant's foray toward an expanded scope working out? Let's revisit how Oracle 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 Oracle.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$132 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||4 years||Pass|
|Stock stability||Beta < 0.9||1.10||Fail|
|Worst loss in past five years no greater than 20%||(21.5%)||Fail|
|Valuation||Normalized P/E < 18||16.51||Pass|
|Dividends||Current yield > 2%||0.9%||Fail|
|5-year dividend growth > 10%||NM||NM|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||12.5%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. NM = not meaningful; Oracle paid its first dividend in April 2009. Total score = number of passes.
Since we looked at Oracle last year, the company has picked up a point. A 20% drop in its share price helped lower its valuation to more attractive levels, but Oracle's future depends on its adapting to keep up with rapidly changing times.
Historically, Oracle was the nearly undisputed king of the business software space. Although SAP (NYSE: SAP ) posed a threat, Oracle nevertheless enjoyed a strong reputation and enjoyed extraordinary renewal rates among its customers.
But more recently, the company has broadened its scope. When it bought Sun Microsystems, Oracle expanded into the hardware space, going up squarely against giant IBM (NYSE: IBM ) as well as Hewlett-Packard (NYSE: HPQ ) . Gone were the synergies by which hardware vendors sought to bundle Oracle software; now, Oracle was a competitor, and those companies treated it as such.
Despite more competition, Oracle has risen to the challenge. It's responding to cloud-based attacks from salesforce.com (NYSE: CRM ) and others by emphasizing its customized solutions that it can tailor to all its customers. At the same time, Oracle's making its own entrance to the cloud and eventually hopes to give clients the exact level of service they want.
For retirees and other conservative investors, the lack of a significant dividend makes Oracle a somewhat questionable call. But for those who are open to growth plays in a retirement portfolio, Oracle has the potential to deliver good-sized returns if it can execute well on its overall strategy.
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, and it reveals three smart stocks for a rich retirement. But don't waste another minute -- read it today.
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