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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.
Being a garbage collector doesn't necessarily have the most glamorous reputation. But Waste Management (NYSE: WM ) has turned a dirty job into a hugely profitable business, finding innovative ways to turn trash into treasure for investors. There's certainly no shortage of refuse around the world, but will fierce competition step in to dethrone the U.S.' garbage giant? Below, we'll revisit how Waste Management 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 Waste Management.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$15.9 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||0.55||Pass|
|Worst loss in past five years no greater than 20%||(8.8%)||Pass|
|Valuation||Normalized P/E < 18||16.69||Pass|
|Dividends||Current yield > 2%||4.1%||Pass|
|5-year dividend growth > 10%||8.6%||Fail|
|Streak of dividend increases >= 10 years||9 years||Fail|
|Payout ratio < 75%||70.1%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Waste Management last year, the company collected the same six-point score. But the stock has lagged the overall market, putting in just a 5% gain over the past year.
Over the years, Waste Management has done an excellent job of dealing with the growing problem of garbage in a profitable way. Adding to its traditional trash disposal and collection services, the company has greatly increased its focus on recycling. It's also been a pioneer in waste-to-energy power plants that save landfill space and turn trash into a valuable energy resource.
Despite its promise, though, Waste Management has had to deal with some tough issues lately. A strike in Seattle lasted for weeks and generated some ill will, as the city had to threaten fines before the dispute was eventually resolved. Even worse, the company cut 2% of its workforce in response to a somewhat disappointing second-quarter performance, with profit falling 12% and revenue growth slowing to just 3%. With ever-increasing competition from rival Republic Services (NYSE: RSG ) and smaller competitors that include Waste Connections (NYSE: WCN ) and Progressive Waste Solutions, Waste Management can't afford to sit still.
Still, a few things are going Waste Management's way. Global competitor Veolia Environnement (NYSE: VE ) chose to sell off its waste management business in the U.S. in order to consolidate its core operations and pay down debt. That removes a big potential threat, at least for the time being. Waste Management is also working with Heckmann (NYSE: HEK ) and its environmental division, indicating its willingness to bring on outside help to help boost its own prospects.
For retirees and other conservative investors, Waste Management's attractive dividend yield and consistent payout growth are definitely positives. But given the difficulty that the company has had sustaining revenue and free cash flow growth, investors may prefer to look for more signs of success before adding the stock 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.
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