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.
Nowhere has the extent of the U.S. economy's recovery from the financial crisis in 2008 been clearer than in the auto industry. Alone among the Big Three automakers, Ford (NYSE: F ) managed to avoid bankruptcy and has thrived despite having to compete against bailed-out competitors General Motors (NYSE: GM ) and Chrysler. But as ailing consumers have held onto their used cars longer, is new-car buying suffering a permanent reduction of demand? Below, we'll revisit how Ford 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 Ford.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$39.5 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||2.36||Fail|
|Worst loss in past five years no greater than 20%||(66.0%)||Fail|
|Valuation||Normalized P/E < 18||8.86||Pass|
|Dividends||Current yield > 2%||1.9%||Fail|
|5-year dividend growth > 10%||NM||NM|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||1.0%||Pass|
|Total score||3 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Ford reinstated its dividend in January 2012. Total score = number of passes.
Since we looked at Ford last year, the company has picked up a point. Despite a 20% drop in its shares, Ford made some major steps forward toward continuing its recovery.
Ford has achieved some big successes in the past year. The company paid its first dividend in more than five years during the first quarter of 2012, and in the past month, Ford earned itself a long-coveted investment-grade bond rating, allowing it to cut its borrowing costs substantially.
One source of both strength and concern is how well Ford has done in the U.S. market. In its most recent quarter, Ford posted a $2.1 billion pre-tax profit, its largest since it started breaking out the segment 12 years ago. Unfortunately, its operations elsewhere in the world have been under pressure, but the company is faring pretty well compared to GM and some of its other competitors.
Moreover, part of Ford's strength undoubtedly resulted from the setbacks that Japanese automakers Toyota (NYSE: TM ) and Honda suffered after 2011's earthquake and tsunami. Lately, Toyota has started seeing sales come back, and although Honda hasn't matched that strength, signs point to Toyota's success coming at least partially at the expense of Ford. Yet Ford's decision to keep incentives low has likely boosted margins, even if it also resulted in lower unit volume.
Ford will have to fight not only against its traditional rivals but also against Tata Motors (NYSE: TTM ) and other players in the high-growth emerging markets that could prove lucrative in the years to come. Moreover, while electric vehicles aren't yet a major competitive force, Tesla Motors (Nasdaq: TSLA ) remains on Ford's radar as a potential long-term threat.
For retirees and other conservative investors, the return of Ford's dividend is another milestone on the road toward a full recovery. The stock will likely remain volatile for a long time, and the shares definitely aren't for the faint of heart. Only those willing to take pretty big risks in their retirement portfolios should consider Ford at this point.
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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