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 you want your portfolio to fly high, then looking at Boeing (NYSE: BA ) makes intuitive sense. The company is a giant in the aircraft manufacturing world, with its model numbers known around the world by travelers and businesses alike. The troubled economy has been far kinder to Boeing than many would have thought, but can the plane-maker capitalize on its opportunities? Let's revisit how Boeing 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 Boeing.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$52.6 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||1.24||Fail|
|Worst loss in past five years no greater than 20%||(50.1%)||Fail|
|Valuation||Normalized P/E < 18||14.15||Pass|
|Dividends||Current yield > 2%||2.5%||Pass|
|5-year dividend growth > 10%||5%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||29.3%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Boeing last year, the company hasn't improved on its 4-point score. The stock has gained about 10% in the past year, but the aircraft maker is at an inflection point in terms of where it may go from here.
Boeing is dealing with two completely different industry dynamics right now. On one hand, its defense business is under fire, with sequestration poised to rip a big hole in the government's defense budget. Although Lockheed Martin's (NYSE: LMT ) fighter program may survive the cuts, General Dynamics (NYSE: GD ) may not be so lucky, as its focus on naval vessels seems not to get as high a priority as aircraft.
On the other hand, Boeing's commercial business has done quite well. Orders have piled in from around the globe, with Southwest Airlines (NYSE: LUV ) among the first buyers of the 737 MAX upgrade and General Electric's (NYSE: GE ) Capital Aviation Services division making its own orders for aircraft to lease out to other airlines.
The key, though, is for Boeing to deliver on its obligations. Production delays on its 787 Dreamliner forced Boeing to pay Air India compensation for missing its order deadlines. That puts recent tension in labor negotiations with engineers into perspective, as a strike could create even further problems for Boeing in trying to meet buyer demand.
In addition, a new threat is on the horizon. With BAE Systems and Airbus maker EADS planning to merge, the other member of Boeing's commercial-airliner duopoly could fight back against Boeing's recent successes with renewed vigor, despite having plenty of challenges to overcome.
For retirees and other conservative investors, Boeing has all the parts in place to succeed. It just hasn't done so yet. If you think it can, then now may be an excellent chance to get it into your portfolio. More risk-averse investors, though, may prefer to wait and see what happens down the road.
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.
As obvious a play as Boeing is, General Electric's dual role in the aircraft industry is pretty compelling as well. Get everything you need to know about the nation's best-known conglomerate in the Fool's premium report on GE. With up-to-date analysis and ongoing updates, you can't lose unless you don't read it, so grab your copy today.
Add Boeing to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.