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.
For investors who are used to following high-growth companies with the potential to deliver hundred-bagger returns over the decades, International Paper (NYSE: IP ) may sound about as interesting as, well, watching trees grow. But the paper-products giant has weathered numerous storms in its industry, offering investors the chance to invest in a business that has both cyclical elements to it as well as other aspects that correlate hardly at all with short-term economic conditions. Is now the right time to be thinking about investing in International Paper? Below, we'll revisit how International Paper 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 International Paper.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$15.8 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of past five 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||2.22||Fail|
|Worst loss in past five years no greater than 20%||(61.8%)||Fail|
|Valuation||Normalized P/E < 18||15.59||Pass|
|Dividends||Current yield > 2%||2.9%||Pass|
|5-year dividend growth > 10%||1%||Fail|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||42.1%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at International Paper last year, the company has kept its middle-of-the-road score of 5. But the stock has soared, rising more than 60% in the past year.
International Paper has entered a new phase of its existence this year, having finally closed on its purchase of Temple-Inland back in February. The company hopes that the merger will save the combined company hundreds of millions of dollars annually.
Interestingly, though, IP planted the seeds for this transformation years ago. By focusing on paper and packaging and moving away from its historical ownership of extensive timberland assets, the company went a different direction from Weyerhaeuser (NYSE: WY ) and Plum Creek Timber (NYSE: PCL ) , which retained substantial timber assets. Paper may not be a growth industry in North America, but emerging markets have a lot of opportunity for growth, and IP is getting into India, Russia, and China.
So far, IP's margins have remained more sustainable than competitors Rock-Tenn (NYSE: RKT ) and MeadWestVaco (NYSE: MWV ) . Even as input costs have risen, IP has been able to pass through price increases to customers, avoiding the margin pinching that would otherwise result.
For retirees and other conservative investors, International Paper may not be the safest stock you can think of. But with a nearly 3% dividend yield and prospects for future growth, investors who are particularly risk-tolerant might want to go with IP as a speculative part of their 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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