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 grocery business is a tough one. Traditional companies like Safeway (NYSE: SWY ) have had to stand up to a host of new competitors doing things a lot differently. Still, the old guards aren't going down without a fight. Can Safeway withstand the pressure and thrive? Below, we'll revisit how Safeway 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 Safeway.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$3.79 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of past five years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.76||Pass|
|Worst loss in past five years no greater than 20%||(29.7%)||Fail|
|Valuation||Normalized P/E < 18||8.68||Pass|
|Dividends||Current yield > 2%||4.4%||Pass|
|5-year dividend growth > 10%||20.4%||Pass|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||33.3%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Safeway last year, the company has dropped a point. The shares have lost about 5% of their value, but that's a lot better than some of its peers have fared.
Supermarket stocks have performed abysmally in recent months. Although Safeway's free-cash-flow contraction has been fairly severe, it pales in comparison to the problems that SUPERVALU (NYSE: SVU ) has faced. With SUPERVALU having eliminated its dividend and announced that it's putting itself up for sale, investors have lost confidence in the entire sector, with Safeway and Kroger (NYSE: KR ) both taking a lot of collateral damage.
At the same time, Safeway has faced competition from other quarters. At the high end, Whole Foods (Nasdaq: WFM ) has captured a lot of the high-margin business that used to support Safeway's business model. Big box stores have also taken away customers, and even drugstore chain Walgreen (NYSE: WAG ) and its peers have expanded grocery lines in order to boost sales. All that spells trouble for the traditional grocer.
Retirees and other conservative investors can point to Safeway's lucrative dividend, which the company has managed to increase for eight consecutive years. But given SUPERVALU's experience, it's hard to have confidence in the sustainability of that payout. Risk-averse investors should wait to see how conditions in the industry play out before committing capital to Safeway shares.
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.
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