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Will T. Rowe Price 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.

Mutual funds are a great way for ordinary investors to get money working for them in the financial markets. But what many people have discovered is that the companies that manage mutual funds often make great investments as well. With an emphasis on no-load funds, T. Rowe Price (Nasdaq: TROW  ) has a strong following among investors. But can the company's financials measure up to its reputation? Below, we'll revisit how T. Rowe Price 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 T. Rowe Price.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$16.1 billion

Pass

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

3 years

Fail

Stock stability

Beta < 0.9

1.61

Fail

 

Worst loss in past five years no greater than 20%

(40.6%)

Fail

Valuation

Normalized P/E < 18

20.99

Fail

Dividends

Current yield > 2%

2.1%

Pass

 

5-year dividend growth > 10%

14.9%

Pass

 

Streak of dividend increases >= 10 years

25 years

Pass

 

Payout ratio < 75%

42.4%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at T. Rowe Price last year, the company has lost two points. The stock's gain of more than 20% over the past year is partially to blame, as it helped push the company's valuation above key levels.

Mutual funds have been a lucrative business for T. Rowe Price and its peers. With many actively managed mutual funds fetching 1% or more in fees, management provides a constant stream of income for the fund company.

But T. Rowe Price faces plenty of competition, especially from providers of exchange-traded funds. ETFs have taken the investing world by storm, and their combination of diversified exposure and cheaper costs make them a formidable adversary to higher-cost actively managed funds. T. Rowe Price has joined Legg Mason (NYSE: LM  ) in trying to offer actively managed ETFs, but thus far, the SEC hasn't been very accommodating in getting requests approved quickly for active ETFs.

Where T. Rowe Price has excelled, though, is in getting into some promising investments. The company was among early investors in Facebook (Nasdaq: FB  ) , Groupon (Nasdaq: GRPN  ) , and Zynga (Nasdaq: ZNGA  ) . As much as those stocks have failed to live up to their expectations, the fact that T. Rowe Price was able to get in at pre-IPO prices rather than having to pay even higher premiums right out of the gate speaks volumes to its standing within the industry.

For retirees and other conservative investors, T. Rowe Price's reasonable dividend and consistent payout growth are key factors in its favor. At current valuations, however, you may do better waiting for a pullback before deciding to make T. Rowe Price part of your 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.

T. Rowe Price's stake in Facebook may not have gone as well as investors would have hoped. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There is a lot more to this company than meets the eye, so read up on whether there is anything "like" about Facebook today, and we'll tell you whether we think the stock deserves a place in your portfolio. Access your report by clicking here.

Add T. Rowe Price 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 and is long January 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. 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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