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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.
As technology continues to advance, the needs of companies and consumers for the infrastructure to support that technology increase exponentially. EMC (NYSE: EMC ) has sought to capitalize on those needs by providing networked storage solutions. With the push toward virtualization and cloud computing, EMC's products have been more in demand than ever, but there's plenty of competition to serve a hungry public. Can EMC keep up its pace? Let's take a look at how EMC 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 EMC.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$57.8 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||5 years||Pass|
|Stock stability||Beta < 0.9||1.14||Fail|
|Worst loss in past five years no greater than 20%||(43.5%)||Fail|
|Valuation||Normalized P/E < 18||28.97||Fail|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||NM||NM|
|Payout ratio < 75%||NM||NM|
|Total score||4 out of 8|
Source: S&P Capital IQ. NM = not meaningful; EMC doesn't pay a dividend. Total score = number of passes.
With 4 points, EMC has a few of the characteristics that conservative investors like to see in a stock. A 25% jump in the stock over the past year is also a positive sign, although the lack of a dividend hurts EMC's performance here.
The story behind EMC's success is simple: Companies are gathering huge amounts of data, and finding ways to store it poses a big challenge. With its 80% stake in VMware (NYSE: VMW ) , EMC keeps its feet not just in the pedestrian data-storage area but also the more cutting-edge area of virtualization.
With competition rising, EMC's new partnership with Cisco Systems (Nasdaq: CSCO ) is an interesting move. Cisco can help EMC and VMware not just build cloud solutions for customers but also provide them within a framework of secure, custom-tailored infrastructure that supports mobile connectivity in an integrated manner that small and mid-sized companies can bring on board without huge upfront ramp-up costs. That's essential for Cisco to catch up with other tech behemoths such as IBM (NYSE: IBM ) , but it also vaults EMC into the big leagues of cloud computing.
Recently, EMC has done a good job of staying on target. Back in July, the company preannounced record earnings and revenue as it moves forward with its "Project Thunder" flash-memory storage expansion. As Fool lead systems engineer Brandon Ragan said earlier this year, the move will speed up computer operations by doing more work in an easily accessible cache. Yet with Cisco having signed on with EMC rival Fusion-io (NYSE: FIO ) , EMC clearly needs to catch up quickly to compete.
For retirees and other conservative investors, the lack of a dividend makes EMC a tough sell. But with huge value coming from its VMware stake and the potential for exciting future growth, EMC may well be worth a closer look for retirement investors willing to take on some risk.
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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