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 has undergone a revolution in recent years. After suffering from a long spell of weak crop prices, food price inflation has greatly boosted prospects for agriculture, and farmers now have the cash to invest in measures that improve yields. Fertilizers like the potash that PotashCorp (NYSE: POT ) provides can make a huge difference, and demand rises sharply during big crop booms. But how long can the good times last? Below, we'll revisit how PotashCorp 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 PotashCorp.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$32.8 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||4 years||Pass|
|Stock stability||Beta < 0.9||1.26||Fail|
|Worst loss in past five years no greater than 20%||(49.8%)||Fail|
|Valuation||Normalized P/E < 18||14.38||Pass|
|Dividends||Current yield > 2%||1.5%||Fail|
|5-year dividend growth > 10%||39.3%||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||8.4%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at PotashCorp last year, the company has jumped by a point. A 30% drop in shares in the past year has brought valuations way down, but it also reflects uncertainty about the future of the bull run in crop prices.
As its name suggests, PotashCorp produces potash, which is an important mineral used in a variety of fertilizers. Along with Mosaic (NYSE: MOS ) , PotashCorp has big potash deposits in Canada that it has used to create extremely fast growth over the past decade.
But more recently, one problem that PotashCorp has faced is that nitrogen-based fertilizers have gained in popularity compared to potash, largely because the natural gas that many nitrogen fertilizer companies use for production has gotten very inexpensive compared to mined potash. CF Industries (NYSE: CF ) and its affiliated Terra Nitrogen (NYSE: TNH ) have seen huge gains that have spurred new IPOs from CVR Partners (NYSE: UAN ) and Rentech Nitrogen Partners.
China will be a big part of determining PotashCorp's future. China's agriculture giant Sinofert signed a contract earlier this year with Canpotex, the Saskatchewan cartel of which PotashCorp is a member, to provide potash to the emerging nation. That could provide a much-needed boost in overall demand.
For retirees and other conservative investors, though, the stock's weak performance and relatively low dividend yield are major concerns. Until the company proves that it can weather any storm the agriculture market throws at it, only risk-tolerant investors should consider PotashCorp for their retirement portfolios.
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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