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.
We live in a big world, and someone has to feed it. ConAgra (NYSE: CAG ) has set out to accomplish its fair share of that monumental task, bridging the gap between farmers and agricultural companies that produce food and consumers who eat it. That's been an important and lucrative business historically, but recently, some challenges have made ConAgra's job a little harder to accomplish. Can the food giant navigate a tough macroeconomic environment and thrive? Below, we'll revisit how ConAgra 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 ConAgra.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10.2 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.66||Pass|
|Worst loss in past five years no greater than 20%||(28.0%)||Fail|
|Valuation||Normalized P/E < 18||24.83||Fail|
|Dividends||Current yield > 2%||3.8%||Pass|
|5-year dividend growth > 10%||5.7%||Fail|
|Streak of dividend increases >= 10 years||5 years||Fail|
|Payout ratio < 75%||83.1%||Fail|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at ConAgra last year, the company has lost two points. A big drop in earnings has pushed the company's valuation and payout ratio way up, even though the stock has only gained a small amount over the past year.
A few months ago, investors in ConAgra were breathing a sigh of relief. A long period of high crop prices that had crunched margins for the food company seemed to be ending, and rival General Mills (NYSE: GIS ) believed that the worst for the food industry was over.
Yet while ConAgra has consistently rewarded its shareholders with strong dividends, profit weakness has pushed its payout ratio up to dangerous levels. By comparison, both Kraft Foods (NYSE: KFT ) and Heinz (NYSE: HNZ ) have significantly lower ratios, even though Heinz manages a dividend yield that almost matches ConAgra's.
But ConAgra has tried to boost its profits through acquisition. After Ralcorp (NYSE: RAH ) spurned repeated buyout attempts, ConAgra instead bought Del Monte Canada, which has been a huge growth leader in the Canadian frozen food market. With operational synergies and added geographical diversification, the merger should help ConAgra restore solid growth even in a challenging market.
For retirees and other conservative investors, it's hard to argue with a dividend yield near 4%. But with an earnings multiple on the high side, investors may prefer to wait to see whether drought conditions this year bring added pressure to ConAgra. If they do and the stock dips, it may give you the buying opportunity that a long-term investor would want before adding ConAgra 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.
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