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Is Archer Daniels Midland the Right Stock to Retire With?

http://www.fool.com/retirement/general/2011/09/16/is-archer-daniels-midland-the-right-stock-to-reti.aspx

Dan Caplinger
September 16, 2011

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. Let's figure out what makes a great retirement-oriented stock, then examine whether Archer Daniels Midland (NYSE: ADM  ) has what we're looking for.

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 Archer Daniels Midland.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$19.1 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

1 year

Fail

Stock stability

Beta < 0.9

0.31

Pass

 

Worst loss in past five years no greater than 20%

(36.9%)

Fail

Valuation

Normalized P/E < 18

10.01

Pass

Dividends

Current yield > 2%

2.3%

Pass

 

5-year dividend growth > 10%

10.9%

Pass

 

Streak of dividend increases >= 10 years

36 years

Pass

 

Payout ratio < 75%

19.4%

Pass

       
 

Total score

 

7 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With seven points, Archer Daniels Midland has plenty of attractive traits for conservative investors. Despite some inconsistent revenue growth and volatile free cash flow figures, the agricultural stock has delivered steadily rising dividends for decades.

Archer Daniels Midland combines two important businesses in one company. ADM takes raw crops like corn and soybeans and uses them to produce a variety of food products, ranging from cattle feed to high-fructose corn syrup, flour, and cooking oils. But it also has a strong presence in the ethanol industry.

ADM has no lack o