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Will IBM 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.

IBM (NYSE: IBM  ) may be the company that invented the PC, but the tech giant has moved well beyond its roots to become an information technology powerhouse, with expertise extending well beyond hardware. But given the stiff competition across the space, can the most influential member of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) stay ahead of the crowd? Below, we'll revisit how IBM 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 IBM.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$228 billion

Pass

Consistency

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

3 years

Fail

 

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

3 years

Fail

Stock stability

Beta < 0.9

0.68

Pass

 

Worst loss in past five years no greater than 20%

(20.8%)

Fail

Valuation

Normalized P/E < 18

17.02

Pass

Dividends

Current yield > 2%

1.7%

Fail

 

5-year dividend growth > 10%

17.1%

Pass

 

Streak of dividend increases >= 10 years

17 years

Pass

 

Payout ratio < 75%

22.9%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at IBM last year, the company has dropped two points, having seen revenue and free cash flow drop over the past year. The stock has also been stuck in the doldrums, rising by less than 5% over the past year.

IBM has done an excellent job of anticipating the need to transform itself from a commodity consumer hardware business to a diversified technology-services company, beating most of its former hardware rivals into more promising areas. But even though IBM has been able to keep raising profits, revenue has slowed down, pointing to long-term concerns for the company.

In response, IBM is looking at several key tech trends. The big data concept is one of the keys to the company's future, as IBM tries to bring not only raw data but also analysis to the deluge of information available via smart mobile devices, making those devices more useful and essential going forward. In addition, the company will challenge Amazon.com (NASDAQ: AMZN  ) , as well as smaller players, in attacking the cloud-computing space: IBM is looking to focus not just on the biggest enterprises, but also on mid-sized businesses that have previously gone underserved.

But IBM isn't the only company doing so. Many believe that Oracle's (NYSE: ORCL  ) recent purchase of Acme Packet was an attack on networking rival Cisco Systems (NASDAQ: CSCO  ) . But both Oracle and Cisco have been trying to achieve the same ends as IBM: broadening their offerings beyond their respective strengths to offer complete technology solutions to their customers without relying on outside third parties.

For retirees and other conservative investors, IBM's dividend yield has always been below where it could be, given the company's greater emphasis on share buybacks to bolster EPS toward its long-term target of $20 per share by 2015. With the stock near full valuation, you may prefer to wait for a pullback before deciding to add IBM 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 you improve your investing skills and teach you how to separate the right stocks from the risky ones.

Find out how Cisco is aiming at IBM by reading our premium report on the stock. Inside, you'll get the latest from our tech analyst on whether Cisco's stock is a smart buy as the company tries to become an all-purpose tech solutions leader. Our report also has you covered with a full year of free analyst updates to keep you informed as its story changes, so click here now to read more.

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


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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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