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.
Chemicals have become a key component of modern living. From fertilizers and pesticides that support the agricultural industry to plastics and other synthetic materials, DuPont (NYSE: DD ) makes many essential products for customers around the world. Yet as economies everywhere face the threat of slowdowns, can DuPont keep up the pace? Below, we'll revisit how DuPont 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 DuPont.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$46.6 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||1.46||Fail|
|Worst loss in past five years no greater than 20%||(40.3%)||Fail|
|Valuation||Normalized P/E < 18||15.76||Pass|
|Dividends||Current yield > 2%||3.4%||Pass|
|5-year dividend growth > 10%||2.3%||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||44.5%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at DuPont last year, the company has gained a point. Yet despite a pickup in earnings that sent its valuation slightly lower, the stock has underperformed the S&P over the past year.
As a major chemical producer, DuPont has been the beneficiary of several lucrative trends in recent years. Perhaps the most important has been the increase in the price of titanium dioxide, a pigment used for whitening in paint and other materials. Although competitors Huntsman (NYSE: HUN ) and Kronos Worldwide (NYSE: KRO ) have also enjoyed positive benefits from high titanium dioxide prices, DuPont is uniquely placed with its plans to expand production of the pigment by establishing a new facility and expanding five other plants.
In addition, DuPont has become a big player in solar energy as well, inking a deal with Yingli Green Energy (NYSE: YGE ) earlier this year to supply photovoltaic materials. The move gives DuPont more exposure to emerging markets as well as providing diversification into the energy industry.
But not everything has gone DuPont's way. Earlier this month, the company lost a patent-infringement case with rival Monsanto (NYSE: MON ) . Under the terms of the verdict, DuPont will have to pay $1 billion to Monsanto for violating patents related to herbicide-tolerant soybeans. As evolution makes crop protection more challenging, intellectual property like Monsanto's Roundup Ready crops will become increasingly valuable.
In its most recent quarter, DuPont had relatively good performance, with earnings rising about 8% and revenue jumping 7%. Yet a mild earnings warning for the rest of the year has held the stock back from participating to the fullest extent in the recent market rally.
For retirees and other conservative investors, DuPont has had volatile share movements that make it somewhat less than ideal. Yet for those willing to put up with ups and downs, the chemical maker still represents a reasonable addition to retirement portfolios, especially if you believe that the economic slowdown won't be as bad as many fear.
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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