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Will DuPont Help You Retire Rich?

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.

Factor

What We Want to See

Actual

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.

Keep searching
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 DuPont to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended creating a modified stock repair against synthetic long position in Monsanto. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 15, 2012, at 11:26 AM, funfundvierzig wrote:

    "Will DD Help You Retire Rich?"

    Investors looking for post-career investment wealth a decade and a half ago, in 1998, who bought into the PR promises of DuPont executives at the time and purchased DD at 80 have been keenly disappointed. The stock has been moribund in the 21st century, and dividend growth anemic.

    ...funfun..

  • Report this Comment On August 15, 2012, at 11:42 AM, funfundvierzig wrote:

    The trial and $1 billion verdict awarded by the federal court jury of eight women and men not only exposed DuPont as a thief of valuable patented seed technology from Monsanto but exposed the massive cover-up of DuPont Management's failed attempt to develop and commericalise their own competing GM seed trait, called DuPont OptimumGAT.

    In addition, the jury also found DuPont had acted deliberately and willfully in stealing technology from Monsanto and refusing to pay for it. Accordingly it is not unlikely the $1 billion award will be increased for additional damages sustained by Monsanto.

    In short, the absence of integrity and innovation at DuPont in the agricultural arena, its major "crown jewel" business, will impede growth and weaken the financial soundness and reputation of this old-line chemical conglomerate based in Delaware.

    Merely the opinion of one individual retail investor with positions, long and short in DD, and long, MON...funfun..

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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