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Will Infosys 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.

For years, Infosys (NYSE: INFY  ) combined some of the best attributes of stocks. As a leader in the emerging Indian stock market, Infosys had access to plentiful capital from global investors. Yet it also capitalized on the trend toward greater outsourcing of labor, especially in the IT realm. But with the U.S. recession and a sluggish recovery, Infosys has had to deal with adversity. Will the company start moving forward again? Below, we'll revisit how Infosys 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 Infosys.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$24.1 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

4 years

Pass

Stock stability

Beta < 0.9

0.56

Pass

 

Worst loss in past five years no greater than 20%

(47.7%)

Fail

Valuation

Normalized P/E < 18

16.38

Pass

Dividends

Current yield > 2%

1.3%

Fail

 

5-year dividend growth > 10%

18.9%

Pass

 

Streak of dividend increases >= 10 years

1 year

Fail

 

Payout ratio < 75%

26.8%

Pass

       
 

Total score

 

7 out of 10

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

Since we looked at Infosys last year, the company has kept its seven-point score, with a cheaper valuation making up for a break in its dividend-increase streak. The stock, though, has lost about 15% in the past year.

With constant advances in technology, many companies simply can't keep up without outside help. That has led to a big boom in the outsourcing industry, with massive companies Accenture (NYSE: ACN  ) and IBM (NYSE: IBM  ) grabbing up business and seeing huge growth rates. Smaller player Cognizant (NASDAQ: CTSH  ) has also benefited from the trend, although the fact that it's headquartered in the U.S. may help it avoid some of the negative implications of outsourcing generally.

But Infosys has suffered from the weakness in the European economy, as potential customers cut back on spending. Moreover, as Fool contributor Dan Carroll outlined last month, India confronts businesses with massive bureaucracy and regulation, giving companies the unappetizing choice of either engaging in corrupt practices or risking costly delays. That certainly doesn't help Infosys or peer Wipro (NYSE: WIT  ) in their efforts to find new business.

In its most recent quarter, Infosys managed to match analyst estimates but delivered guidance that was less optimistic than investors had hoped. With continuing weakness in global IT spending, Infosys has to hope for a recovery in order to get its financials back up to snuff.

For retirees and other conservative investors, Infosys is approaching the full extent of its potential. Most retirement investors would prefer a higher yield and see dividend volatility as being disturbing. As a play on global growth, though, Infosys is worth a second look -- especially if you believe that India can recover from its recent slowdown.

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.

The best investing approach is to choose great companies and stick with them for the long term. In our free report, "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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Dan Caplinger
TMFGalagan

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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