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Will Valspar Help You Retire Rich?

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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.

Painting may not be every homeowner's favorite activity, but everyone pretty much has to do it from time to time. That may be bad news for you and me, but it's great for paint maker Valspar (NYSE: VAL  ) . Still, Valspar goes beyond simple paint, with its coatings division also including varnish and stain along with specialized products for certain industrial manufacturing like soda-can linings as well as aerosol coatings. How long can the good times last for the company? Below, we'll revisit how Valspar 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 Valspar.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$5.4 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

4 years

Pass

Stock stability

Beta < 0.9

0.92

Fail

 

Worst loss in past five years no greater than 20%

(17.4%)

Pass

Valuation

Normalized P/E < 18

20.57

Fail

Dividends

Current yield > 2%

1.3%

Fail

 

5-year dividend growth > 10%

9.3%

Fail

 

Streak of dividend increases >= 10 years

34 years

Pass

 

Payout ratio < 75%

NM

NM

       
 

Total score

 

4 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative GAAP earnings. Total score = number of passes.

Since we looked at Valspar last year, the company has had its score cut in half. A lot of that came from the much higher valuation that resulted from a roughly 85% gain in the stock over the past year, as P/E and beta rose while dividend yields fell.

In general, paint manufacturers have had a great year, and that's helped boost that side of Valspar's business. Sherwin-Williams (NYSE: SHW  ) and PPG Industries (NYSE: PPG  ) are also riding the wave of enthusiasm over a potential bottom for the housing market, and if the recovery picks up steam, then even more homeowners may want to get on the bandwagon and get their homes in better condition. With Lowe's (NYSE: LOW  ) being a major customer, Valspar also stands to benefit if Lowe's can lure more customers into its stores.

Admittedly, raw materials for paint production have gotten more costly, as DuPont (NYSE: DD  ) and other manufacturers of titanium dioxide, a key pigment for paint production, have raised their prices significantly. So far, though, most paint producers have been able to pass on those higher costs to consumers.

Retirees and other conservative investors shouldn't let GAAP losses due to a goodwill impairment charge lead them to think that Valspar is a money-losing stock. More concerning is that the stock may have come too far too fast. Value-conscious investors should wait for a pullback rather than trying to jump on the moving bus of Valspar's high-flying shares right now.

Keep searching
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.

Add Valspar to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams and writing covered calls on Lowe's. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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9/18/2014 4:00 PM
DD $71.20 Up +1.95 +2.82%
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