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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.
In an industry where name-brand awareness is key, you'd think that a company with a nearly unknown name would be at a competitive disadvantage. But Yum! Brands (NYSE: YUM ) has turned its KFC, Pizza Hut, and Taco Bell franchises into huge moneymakers in their own right, even if the Yum! name isn't a high-recognition moniker. Yet with the company having relied on expansion around the world, can the fast-food giant overcome a troubled global economy? Let's revisit how Yum! Brands 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 Yum! Brands.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$30.3 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||0.89||Pass|
|Worst loss in past five years no greater than 20%||(16%)||Pass|
|Valuation||Normalized P/E < 18||25.12||Fail|
|Dividends||Current yield > 2%||1.7%||Fail|
|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||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Yum! Brands last year, the company has dropped a point, as free cash flow shrank a bit last year. But shareholders enjoyed about a 20% gain in their stock's price over the past year.
With its multiple restaurant chains, Yum! benefits from a diversified set of food offerings. Innovation is the name of the game in fast food, and Yum! has the hit of the year with its Doritos Locos taco. The move taps into Yum!'s former relationship with PepsiCo (NYSE: PEP ) , whose Frito-Lay division makes Doritos.
Clearly, though, Yum! doesn't have the industry all to itself. McDonald's (NYSE: MCD ) has arguably exceeded Yum!'s achievements domestically and is striving equally hard to boost its presence internationally, especially in China. Yum!'s KFC has huge market share in the world's most populous nation, but McDonald's is doing its utmost to change that. Moreover, Chipotle (NYSE: CMG ) has erupted onto the U.S. scene with its burritos challenging Yum!'s Taco Bell dominance, despite facing some setbacks lately.
With all its international success, though, one place where Yum! hasn't ventured is Latin America. That's a growth area that Arcos Dorados (NYSE: ARCO ) has tapped with great success, and eventually, Yum! could get itself a growth boost if it can fit itself into the mix among fast-growing economies there.
For retirees and other conservative investors, Yum! is a bit of a risky play right now. With a yield less than 2% and a rich valuation, you may prefer to wait for a pullback before considering whether Yum! deserves a place in 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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