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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.
If anticipation ever made you wait for your ketchup to come out of the bottle, then you're probably already familiar with the many products that Heinz (NYSE: HNZ ) makes. From its ketchup and sauces to a wide array of other foods, Heinz is a mainstay in many kitchens. But pressure on food prices has hurt the entire industry. Can Heinz get through the worst of times? Below, we'll revisit how Heinz 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 Heinz.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$18.1 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.52||Pass|
|Worst loss in past five years no greater than 20%||(16.5%)||Pass|
|Valuation||Normalized P/E < 18||20.75||Fail|
|Dividends||Current yield > 2%||3.6%||Pass|
|5-year dividend growth > 10%||6.5%||Fail|
|Streak of dividend increases >= 10 years||9 years||Fail|
|Payout ratio < 75%||67.1%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Heinz last year, the company has kept its six-point score. But the stock has been a little bit of a disappointment for investors, rising less than 10% over the past year.
Heinz may be best known for condiments, but its products span a much wider range. Sauces and ketchup account for nearly half of total revenue, but meals and snacks amounted to almost 40% of sales in fiscal 2012, which ended in April.
But most food companies have struggled to deal with narrowing margins and tough economic conditions, and Heinz hasn't been immune. General Mills (NYSE: GIS ) cut 850 jobs earlier this year to try to save money to offset rising input costs, while Campbell Soup (NYSE: CPB ) has suffered similar margin contraction as Heinz.
Still, Heinz has a leg up on much of its competition. Compared to Hunt's maker ConAgra (NYSE: CAG ) , Heinz has much better margins and a lower payout ratio. That allowed Heinz to raise its dividend recently, marking the ninth straight year the company has pushed its payout upward. With the coming split-up of Kraft Foods (NYSE: KFT ) , though, Heinz will compete more directly against Kraft's grocery business, and you can expect some new initiatives from the newly independent division that could hit at Heinz.
For retirees and other conservative investors, Heinz is an interesting play. With a dividend yield of more than 3.5%, it's an obvious source of income. But with a fairly high earnings multiple, Heinz looks a bit overpriced to some value investors. Unless you're willing to take some valuation risk, I'd suggest waiting for a pullback before taking a serious look at adding Heinz to your retirement portfolio.
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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