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.
The agricultural industry has been a huge growth center in recent years, and fertilizer companies have been at the forefront of the trend. Agrium (NYSE: AGU ) has tried to cash in on the increased demand for fertilizers, but it faces competition from other companies that have benefited from cost advantages. Can Agrium keep up with its rivals, and will the good times last for farming in general? Below, we'll see how Agrium 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 Agrium.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$16 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||1.69||Fail|
|Worst loss in past five years no greater than 20%||(53.3%)||Fail|
|Valuation||Normalized P/E < 18||10.72||Pass|
|Dividends||Current yield > 2%||1.0%||Fail|
|5-year dividend growth > 10%||45.8%||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||3.0%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With five points, Agrium finishes in the middle of the pack. But its stock performance recently has been anything but average, with a better than 35% gain in share price over the past year.
Agrium is just one of many fertilizer companies, but it has a diversified product base that puts it in an unusual position. As part of the Canpotex potash cartel, Agrium and peers Mosaic (NYSE: MOS ) and PotashCorp (NYSE: POT ) have risen from obscurity in the past decade to take their place as important producers of strategically important potash and phosphates.
But lately, potash producers have had a disadvantage compared to nitrogen fertilizer companies Terra Nitrogen (NYSE: TNH ) and CVR Partners (NYSE: UAN ) . Because nitrogen fertilizers use natural gas as an input, low gas prices have made them cheaper. Unlike PotashCorp and Mosaic, Agrium gets about a third of its revenue from nitrogen-based fertilizer sales. Moreover, with crop protection products and other related goods, Agrium isn't vulnerable to the whims of any single market.
The big question is whether Agrium can stay on the fence. Nitrogen-producing competitors are taking steps to boost production, but if natural gas prices rise, too much emphasis on nitrogen could backfire. Yet failures in the potash market could jeopardize Agrium's financial health as well.
For retirees and other conservative investors, extreme share-price volatility and a meager dividend weigh against including Agrium in a retirement portfolio. Yet with its cheap valuation, those who are more risk-tolerant may want to consider it as a speculative play, despite its already substantial gains in stock price recently.
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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