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.
Big box stores haven't exactly been in favor lately, with online retailers presenting a big threat to the costly brick-and-mortar behemoths that many popular retail chains have to sustain. But some big boxes have done better than others. Staples (Nasdaq: SPLS ) has done a good job of outlasting its office-supply peers through a combination of smart store operations and a strong online presence. But does the retailer have what it takes to survive and thrive in the long run? Let's revisit how Staples 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 Staples.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$8.4 billion||Fail|
|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||3 years||Fail|
|Stock stability||Beta < 0.9||0.91||Fail|
|Worst loss in past five years no greater than 20%||(37.4%)||Fail|
|Valuation||Normalized P/E < 18||9.91||Pass|
|Dividends||Current yield > 2%||3.6%||Pass|
|5-year dividend growth > 10%||7.7%||Fail|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||31.2%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Staples last year, the company has lost 2 points. Rising share-price volatility and decelerating dividend growth were responsible for the score drop, and investors had to deal with about a 10% decline in the shares over the past year.
The entire office supply sector has gotten crushed in recent years. As Staples fought against rivals OfficeMax (NYSE: OMX ) and Office Depot (NYSE: ODP ) , all three companies lost business to Amazon.com (Nasdaq: AMZN ) , which in many cases offered free shipping and lower prices. Even though Office Depot and OfficeMax have rebounded sharply in the past month after affirming their full-year 2012 guidance, neither is close to having regained losses from the past few years.
Having seemingly outlasted its rivals earlier in the recovery, Staples has taken a particular big hit itself. In its most recent quarter, Staples missed both sales and earnings estimates and got downgraded in response. The damage may have come from Amazon's specific initiative to emphasize office supplies, which will inevitably hurt Staples despite its success in keeping online revenue figures relatively high. Moreover, Wal-Mart (NYSE: WMT ) has also sought to get into the office-supply market, giving it yet another niche to try to capitalize on.
For retirees and other conservative investors, Staples is one of the rare stocks that has posted bigger losses in 2011 than it did in the bear-market year of 2008. As a potential turnaround opportunity, Staples has potential, but it's not for the faint of heart and not the ideal choice for a non-speculative 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.
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