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.
Among consumer-products companies, Unilever (NYSE: UL ) doesn't quite have the name awareness that some of its U.S.-based counterparts have. But most Americans would be very familiar with Unilever's products, which include everything from Dove soap and Hellmann's mayonnaise to Lipton tea. Given Unilever's presence in Europe, however, many investors have shied away from the company, fearing the contagion that's sweeping the continent. Has that aversion made the company's shares a good value? Below, we'll revisit how Unilever 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 Unilever.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$90.2 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||1 year||Fail|
|Stock stability||Beta < 0.9||0.35||Pass|
|Worst loss in past five years no greater than 20%||(36.6%)||Fail|
|Valuation||Normalized P/E < 18||18.32||Fail|
|Dividends||Current yield > 2%||3.9%||Pass|
|5-year dividend growth > 10%||5.6%||Fail|
|Streak of dividend increases >= 10 years||12 years||Pass|
|Payout ratio < 75%||58.4%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Unilever last year, the company has kept its six-point score. The consumer product maker's stock has stayed relatively stable as well despite the pressures of Europe.
When markets get volatile, nervous investors turn to consumer stocks for some stability. But even the least volatile of stocks can suffer from tough business conditions. Across the industry, Procter & Gamble (NYSE: PG ) , Clorox (NYSE: CLX ) , and Colgate-Palmolive (NYSE: CL ) have all had to deal with rising costs of raw materials that have squeezed margins and threatened profits.
Moreover, the slowdown in Europe has hurt consumer-oriented businesses. Admittedly, though, multinational giants like P&G and Unilever have such global reach that where they're headquartered makes little difference, and both have suffered from the European troubles.
One place where Unilever is seeking to expand is in emerging markets. With strong cash flow, the company has the means to finance capital expenditures aimed at widening its exposure around the world without creating stress to its balance sheet. And with healthier growth, building strength there could boost Unilever's overall profitability.
For retirees and other conservative investors, Unilever's commitment to raising its healthy dividend is one of its best attributes. The company isn't bargain-priced at the moment, and its shares aren't invulnerable to a downturn. But for a safety play against a vanilla recession, Unilever makes a reasonable choice for further research.
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.
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