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.
The retail industry has never been more competitive, with retailers targeting every niche of the consumer base around the world. As a high-end department store, Nordstrom (NYSE: JWN ) has benefited from the trend that has seen luxury-oriented businesses outperform mid-market retailers. But as the economy seems prone to stall out after a few years of a slow recovery, could that trend reverse itself? Below, we'll revisit how Nordstrom 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 Nordstrom.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10 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||3 years||Fail|
|Stock stability||Beta < 0.9||1.63||Fail|
|Worst loss in past five years no greater than 20%||(62.6%)||Fail|
|Valuation||Normalized P/E < 18||14.80||Pass|
|Dividends||Current yield > 2%||2.2%||Pass|
|5-year dividend growth > 10%||16.4%||Pass|
|Streak of dividend increases >= 10 years||3 years||Fail|
|Payout ratio < 75%||29.5%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Nordstrom last year, the company has picked up a point. A 10% rise in its stock price got its market cap just over the $10 billion mark, but the retailer still faces many challenges in its quest toward stronger growth.
Nordstrom suffered badly during the 2008 bear market year, watching its shares drop more than 60% as sales plunged. But the stock rebounded strongly, nearly tripling in 2009 as revenue began to come back.
Nordstrom's resilience comes from an interesting mix of stores. Its namesake brand focuses on high-end luxury goods. But its Nordstrom Rack stores compete against brand-discounters Ross Stores (Nasdaq: ROST ) and TJX's (NYSE: TJX ) T.J. Maxx with stylish fashions at discount prices. The company also has an online presence as well, including a daily deals website and a substantial following on Pinterest.
Despite its down-market presence, Nordstrom also benefits from avoiding discounting on its high-margin items. With J.C. Penney (NYSE: JCP ) and Abercrombie & Fitch (NYSE: ANF ) both having suffered greatly from customer expectations of discounts, Nordstrom has trained its customers well in a way that supports its bottom line.
For retirees and other conservative investors, Nordstrom is a strong player among peers in a tough environment. With a good and growing dividend, decent valuation, and room to run, Nordstrom is worth a closer look for those wanting retail exposure in 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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