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.
Many U.S. investors think of steel as a declining industry. But around the world, steel production has been instrumental in driving growth in construction and infrastructure, key elements of successful growing economies. Over the years, Nucor (NYSE: NUE ) has benefited greatly from global growth trends, but ever since the financial crisis, slowdowns around the world have kept its future in question. Can the steelmaker make its way in a weak industry environment? Below, we'll revisit how Nucor 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 Nucor.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$12 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||1.05||Fail|
|Worst loss in past five years no greater than 20%||(19.4%)||Pass|
|Valuation||Normalized P/E < 18||22.80||Fail|
|Dividends||Current yield > 2%||3.9%||Pass|
|5-year dividend growth > 10%||28.3%*||Pass|
|Streak of dividend increases >= 10 years||39 years*||Pass|
|Payout ratio < 75%||80.5%||Fail|
|Total score||5 out of 10|
Source: S&P Capital IQ.Total score = number of passes. * Excludes supplemental dividends.
Since we looked at Nucor last year, the company has kept its five-point score. The stock has also done reasonably well, rising about 15% over the past year.
Nucor is just one of many struggling players in the steel industry. With demand from China in particular on the decline due to macroeconomic pressures, domestic producers U.S. Steel (NYSE: X ) as well as global giant ArcelorMittal (NYSE: MT ) have had a tough time keeping their businesses strong.
Nucor has long differentiated itself, though, with its innovative mini-mills that allow production to take place closer to sources of raw materials as well as Nucor's customer base. Still, Nucor expects its third-quarter earnings to drop by about half compared to last year. Steel Dynamics (Nasdaq: STLD ) , which also uses a mini-mill strategy, has been targeted by analysts with similar concerns.
But good news may be around the corner. China recently announced a $150 billion infrastructure stimulus package. Korean steelmaker POSCO (NYSE: PKX ) may seem better located to profit from Chinese spending, but with Nucor already having moved strongly to position itself to take advantage of similar needs for U.S. projects, it's a natural to grab up its share of new Chinese demand as well.
For retirees and other conservative investors, Nucor's track record of dividend growth is impressive, although the company has stopped making the supplemental dividend payouts it made before the financial crisis. If you think that the current pressures represent cyclical lows, then now would be a good time to look more closely at Nucor as a potential retirement investment.
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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