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Will Flowers Foods Help You Retire Rich?

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.

Simple businesses are the easiest for investors to understand. At first glance, nothing could be simpler than selling bread to hungry customers. But even though Flowers Foods (NYSE: FLO  ) has navigated the turbulent food business for decades, challenging headwinds continue to buffet the industry. Will Flowers be able to keep rising like a well-yeasted loaf? Below, we'll revisit how Flowers Foods 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 Flowers Foods.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$2.6 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

2 years

Fail

Stock stability

Beta < 0.9

0.13

Pass

 

Worst loss in past five years no greater than 20%

0.5%*

Pass

Valuation

Normalized P/E < 18

22.09

Fail

Dividends

Current yield > 2%

3.4%

Pass

 

5-year dividend growth > 10%

19.5%

Pass

 

Streak of dividend increases >= 10 years

11 years

Pass

 

Payout ratio < 75%

68.7%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes. *Represents a gain; Flowers Foods has not suffered a loss in the past five calendar years.

Since we looked at Flowers Foods last year, the company has kept its seven-point score. But its stock has struggled to avoid losses over the past year, with a particularly substantial drop over the past several months.

Flowers has put in impressive performance in recent years. With its extensive distribution network, Flowers is in the enviable position of having small local bakeries in the palm of its hand, as Flowers is able to offer easier access to lucrative markets after it buys bakeries out. That's a model that has been extremely successful for Coca-Cola (NYSE: KO  ) , and it explains how Flowers has been able to grow over the years.

But this year, Flowers will face a huge shock in the form of the drought. Food producers Kellogg (NYSE: K  ) and General Mills (NYSE: GIS  ) have already noted the likelihood of higher prices for the crops they need to make their products, and Flowers could also see its margins squeezed with higher input costs. Flowers' recent buyout of Lepage Bakeries earlier this year will give it a market-share advantage, but investors may still feel the pinch if crop prices follow their expected path higher.

Still, reduced profits aren't a certainty. Panera Bread (Nasdaq: PNRA  ) has enjoyed relatively stable wheat prices for its baked goods, and Flowers may also benefit from that trend.

For retirees and other conservative investors, an 11-year streak of higher dividends is a definite positive for the stock, but Flowers shares also fetch a fairly high price at the moment. If you're willing to pay up for stability, though, Flowers could still make a smart acquisition at current levels.

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.

Bread is a basic staple, so Flowers easy passes under the radar as a smart stock. But it's not the only one. Our new free report highlights three less-than-luxurious stocks that could provide wealth-creating results for investors. Just click here to read it now.

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread. Motley Fool newsletter services recommend Flowers Foods, Panera Bread, and Coca-Cola. Try any of our Foolish newsletter services free for 30 days. 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 Motley 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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Related Tickers

12/19/2014 4:04 PM
FLO $19.18 Up +0.17 +0.89%
Flowers Foods CAPS Rating: ****
GIS $53.81 Up +0.30 +0.56%
General Mills, Inc… CAPS Rating: ****
K $66.82 Up +0.80 +1.21%
Kellogg Company CAPS Rating: ****
KO $41.95 Down -0.44 -1.04%
Coca-Cola CAPS Rating: ****
PNRA $165.60 Down -3.08 -1.83%
Panera Bread CAPS Rating: ****

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