Will Honda 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.

Honda Motor (HMC -0.49%) has had to deal with some huge issues in the past couple of years. After dealing with devastating problems after the Japanese earthquake and tsunami in early 2011, the automaker has been trying to get back to its winning ways. But with perennial competition from its Japanese rivals as well as renewed strength from U.S. automakers, Honda is facing an uphill battle. Can the Japanese giant come back? Below, we'll revisit how Honda Motor 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 Honda Motor.

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

Since we looked at Honda Motor last year, the company has picked up a point, with its earnings multiple falling dramatically. That comes even with a slight 10% rise in the company's share price, showing that earnings are moving in the right direction.

Honda has largely recovered from the 2011 crisis in Japan. Overall strength in the U.S. market has definitely helped Honda make some gains compared to its previous year.

But Honda is dealing with a very tough situation around the world for its auto business. Close to home, rival Toyota (TM 1.07%) is putting Honda's results to shame, with Toyota raising profit forecasts and expected to triple its profits in the current fiscal year versus last year. Meanwhile, Honda has had to cut its full-year-profit estimates by 20%, in part due to tensions between Japan and China hurting Honda's sales in the emerging-market country.

Even in the strong U.S. market, Honda can't claim flawless victory. Ford (F 0.08%) has done an excellent job of clawing back market share from Honda and other peers, as CEO Alan Mulally helped Ford come back from the brink of failure without the need for bankruptcy or a government bailout. Meanwhile, General Motors (GM -0.04%) has overcome a longtime reputational disadvantage by boosting car quality, eating into one of Honda's primary distinctions.

In its most recent quarter, Honda's sales jumped 20% with income rising 36% over the year-ago quarter. Yet with lower forecasts, it's hard to get excited about the company. With Tesla Motors (TSLA 12.06%) taking strides toward making all-electric cars a reality, Honda hasn't been perceived as an innovator as much lately as it once was.

For retirees and other conservative investors, Honda looks like a better value than it's been for several years. But with at least a few signs of a value trap, you may prefer to wait and see how bad Honda's expected slowdown is before committing to adding the stock to 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.

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