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.

There's an old saying: Two's company, but three's a crowd. In the drugstore industry, Rite Aid (NYSE:RAD) has been the odd company out for quite a while now. As its larger competitors battle it out for supremacy, Rite Aid has struggled under the weight of enormous debt and lackluster growth. Can the retailer turn three into a lucky number? Below, we'll take a look at how Rite Aid 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 Rite Aid.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$1.05 billion

Fail

Consistency

Revenue growth > 0% in at least four of five past years

2 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

2.32

Fail

 

Worst loss in past five years no greater than 20%

(88.9%)

Fail

Valuation

Normalized P/E < 18

NM

NM

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

 

0 out of 7

Source: S&P Capital IQ. Total score = number of passes.

Without scoring a single point, Rite Aid doesn't give conservative investors anything they like to see in a stock. Although the stock is up 20% over the past year, it has fallen significantly from much higher levels earlier in 2012.

Rite Aid has found itself stuck behind industry leaders Walgreen (NASDAQ:WBA) and CVS Caremark (NYSE:CVS) for a long time. Unlike Walgreen and CVS, which have a long history of consistent profitability, Rite Aid has lost money in 21 consecutive quarters, and analysts expect the losses to continue next quarter as well.

Earlier this year, though, Rite Aid got a chance to benefit from Walgreen's woes. As Walgreen's dispute with Express Scripts (NASDAQ:ESRX) escalated into a months-long impasse, customers in the Express Scripts network found themselves needing to switch from Walgreen to CVS or Rite Aid. The stock rose on that news, but when Walgreen finally resolved its dispute, shares retreated once more.

Rite Aid just hasn't been able to get on the right foot with its business. In September, same-store sales fell 0.7%, with pharmacy sales falling even more dramatically. Increased sales of generics hurt the figures, even as raw prescription counts actually rose.

For retirees and other conservative investors, Rite Aid still hasn't demonstrated any ability to make money. With no dividend and limited future prospects, it's hard to envision any but the most speculative of investors wanting to own the stock in a retirement portfolio.

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.

Add Rite Aid 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. The Motley Fool owns shares of Express Scripts. Motley Fool newsletter services have recommended buying shares of Express Scripts. 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.