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.
High energy costs have changed a lot of things for consumers around the world. Here in the U.S., expensive gasoline has forced families to cut back on discretionary spending and made many struggle to make ends meet. For commercial transportation, though, high energy prices have supported CSX (NYSE: CSX ) and the railroad industry, as moving goods by train offers distinct gains in energy efficiency over trucks and other alternatives. With oil prices plunging in recent weeks, however, are the days of strong railroads numbered? Below, we'll revisit how CSX 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 CSX.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$23.5 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||1.24||Fail|
|Worst loss in past five years no greater than 20%||(25.1%)||Fail|
|Valuation||Normalized P/E < 18||13.10||Pass|
|Dividends||Current yield > 2%||2.5%||Pass|
|5-year dividend growth > 10%||30.0%||Pass|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||27.1%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at CSX last year, the company has kept its six-point score. After a string of strong years, the railroad has seen its shares struggle over the past year.
CSX has had to deal with big changes in demand for its services. Until recently, strength in the coal industry helped keep shipment volumes high across the industry. But low natural-gas prices that have resulted from big supplies produced from hydraulic fracturing have pushed down coal demand, especially as utilities switch to natural gas for electricity generation. Although CSX has still seen decent activity abroad, it has far greater exposure to coal as a percentage of its revenue than Union Pacific (NYSE: UNP ) and Kansas City Southern (NYSE: KSU ) .
Ironically, though, the very industry that's giving railroads some difficulty has also opened up opportunities. Even as coal shipments fall, CSX and similarly coal-dependent competitor Norfolk Southern (NYSE: NSC ) have greatly boosted shipments of sand needed for hydraulic fracturing to drilling companies in the Marcellus Shale region.
For retirees and other conservative investors, those dividends are arguably the most compelling thing about CSX right now. Facing headwinds, railroads may continue to struggle for a while, but smart long-term investors will see low valuations as a great opportunity to look more closely at CSX as a potential addition to 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.
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.
Add CSX to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.