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.

As much as everyone needs to eat, the food industry can be an extremely boring place to invest. Nevertheless, some of the most boring industries are also the most lucrative. For Ralcorp Holdings (NYSE:RAH), which is the largely anonymous name behind many store brands, food has been a profitable business lately. What's next for the company? Below, we'll revisit how Ralcorp Holdings 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 Ralcorp Holdings.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$5 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

0.75

Pass

 

Worst loss in past five years no greater than 20%

(3.9%)

Pass

Valuation

Normalized P/E < 18

33.75

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

 

Streak of dividend increases >= 10 years

NM

NM

 

Payout ratio < 75%

NM

NM

       
 

Total score

 

3 out of 8

Source: S&P Capital IQ. NM = not meaningful due to lack of dividend. Total score = number of passes.

Since we looked at Ralcorp Holdings last year, the company has lost a point, as its valuation has soared. But shareholders aren't unhappy with a takeover bid that helped reverse what would otherwise have been a substantial loss for the stock over the past year.

Ralcorp is a big player in the commodity food business, with its customer list including consumer favorite Trader Joe's as well as Costco (NASDAQ:COST) and other stores that sell private-label food brands. With Whole Foods (NASDAQ:WFM) having developed its own 365 store brand, it's clear that the private-label trend is here to stay.

Yet Ralcorp won't have the opportunity to keep pursuing the private-label market independently. The big news for Ralcorp in 2012 was the resolution of its long back-and-forth with ConAgra (NYSE:CAG) about a possible acquisition. After several rounds of offers and rejections, the companies finally agreed to merge in a $6.8 billion deal that will give investors $90 per share in cash. The merger is expected to close sometime during the first quarter of 2013, and after the acquisition, ConAgra will be the biggest player in private-label food and the second-largest commodity food company next to Kraft Foods (NASDAQ:KRFT).

For retirees and conservative investors, Ralcorp shares represent merely an arbitrage play at this point. But if you think Ralcorp's business was worth investing in, then you'll want to take a look at ConAgra to see if it would fit better as a food play for 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.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Costco and Whole Foods. The Motley Fool owns shares of Costco and Whole Foods. 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.