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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.
On a purely personal level, Kroger (NYSE: KR ) holds a special place in my heart as my first employer. But from a business standpoint, the supermarket industry has gotten fiercely competitive, and Kroger is scrambling to hold its own under tough conditions. With new entrants threatening already thin margins, can the old-guard grocery chain survive? Below, we'll revisit how Kroger 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 Kroger.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$12.1 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||0.39||Pass|
|Worst loss in past five years no greater than 20%||(21%)||Fail|
|Valuation||Normalized P/E < 18||11.14||Pass|
|Dividends||Current yield > 2%||2%||Pass|
|5-year dividend growth > 10%||10.4%||Pass|
|Streak of dividend increases >= 10 years||5 years||Fail|
|Payout ratio < 75%||42.2%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Kroger last year, the company has picked up a point. The stock has only managed to post a 5% gain over the past year, but that's still better than some of its rivals have done.
Kroger has had to deal with changing conditions in the grocery industry. With Whole Foods Market (Nasdaq: WFM ) having posted big gains on the back of the continuing popularity of premium food products, Kroger has had to fight just to keep its narrow net margins positive. In its most recent quarter, though, Kroger topped analyst estimates and, more important, raised its earnings outlook for the full 2012 fiscal year.
Kroger is trying to go after popular trends to boost profits. For instance, it will offer a private-label K-Cup line to go up against Green Mountain Coffee Roasters (Nasdaq: GMCR ) in its Keurig single-serve machines, a move that could help it improve margins on coffee sales. Yet Safeway (NYSE: SWY ) and SUPERVALU (NYSE: SVU ) have or will soon have K-Cup offerings of their own, and Fool analyst Austin Smith believes that both moves will do more to hurt Green Mountain than to help any of the grocery chains significantly.
One thing Kroger has going for it is community awareness. Its charitable contributions to local communities are unparalleled, with donations of 10% of earnings to charity in 2010.
For retirees and other conservative investors, Kroger appears to be at a crossroads. If it can outperform its traditional grocery peers, then it may be able to generate enough economies of scale to overcome newer competitors. Before you add the stock to your retirement portfolio, though, you should be comfortable with the risk that Kroger will fail to achieve that necessary success.
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.
Kroger seems like a simple business, but there's a lot more to rival Whole Foods than meets the eye. Get the entire scoop from the Fool's top analysts as they take an in-depth look at the extraordinary store chain in the Fool's premium report on Whole Foods. It's there for the taking, so don't wait -- buy it today.
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