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.

American Tower (NYSE:AMT) is technically a technology stock, but it's not the sort of high-tech company you might expect. Rather, the company has a very simple business model: It erects communications towers and then leases antenna space to broadcast companies, wireless providers, and other tenants. American Tower has properties around the world, from Chile and Mexico to India and South Africa. But with such a simple business, how can American Tower fend off competitors? Below, we'll take a look at how American Tower 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 American Tower.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$29 billion

Pass

Consistency

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

5 years

Pass

 

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

4 years

Pass

Stock stability

Beta < 0.9

0.56

Pass

 

Worst loss in past five years no greater than 20%

(31.2%)

Fail

Valuation

Normalized P/E < 18

80.23

Fail

Dividends

Current yield > 2%

1.3%

Fail

 

5-year dividend growth > 10%

NM

NM

 

Streak of dividend increases >= 10 years

NM

NM

 

Payout ratio < 75%

18.1%

Pass

       
 

Total score

 

5 out of 8

Source: S&P Capital IQ. NM = not meaningful; American Tower paid its first dividend in April 2012. Total score = number of passes.

American Tower scores five points, showing that it has some but definitely not all of the traits that conservative investors like to see in a stock. A low dividend yield and extremely high valuation raise some concerns, even though the stock has risen 30% over the past year.

The entire cellular tower sector has done extremely well in recent years. Given the huge growth in demand for increasingly sophisticated wireless access, service providers seeking to upgrade their wireless networks need to add more and more coverage. That's been beneficial not just to American Tower but to peers Crown Castle (NYSE:CCI) and SBA Communications (NASDAQ:SBAC) as well.

Analysts are increasingly optimistic about American Tower's prospects in light of the recent deal between Japan's SoftBank and Sprint (NYSE:S). With SoftBank set to make a big investment in the No. 3 wireless provider in the U.S., it's much more likely that Sprint will spend more money to upgrade its network capabilities to match those of rivals AT&T (NYSE:T) and Verizon. In the ongoing arms race among network providers, upgrades mean more potential lease revenue for American Tower.

At the beginning of the year, American Tower transformed itself into a real-estate investment trust. The move eliminates corporate tax on the company, instead requiring it to pay out the bulk of its income as dividend distributions to shareholders. The stock's yield of just over 1% isn't all that rich, but it's better than nothing (which is what both SBA and Crown Castle pay).

For retirees and other conservative investors, American Tower has a safe, easy-to-understand business model. But at current valuations, it's hard to see much value left in the stock. Retirement investors would do well to hold out for a pullback before considering adding American Tower to their portfolios.

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.

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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Tower and AT&T. 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.