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Will Boeing Help You Retire Rich?

http://www.fool.com/retirement/general/2012/09/18/will-boeing-help-you-retire-rich.aspx

Dan Caplinger
September 18, 2012

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.

If you want your portfolio to fly high, then looking at Boeing (NYSE: BA  ) makes intuitive sense. The company is a giant in the aircraft manufacturing world, with its model numbers known around the world by travelers and businesses alike. The troubled economy has been far kinder to Boeing than many would have thought, but can the plane-maker capitalize on its opportunities? Let's revisit how Boeing 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 Boeing.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $52.6 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 2 years Fail
Stock stability Beta < 0.9 1.24 Fail
  Worst loss in past five years no greater than 20% (50.1%) Fail
Valuation Normalized P/E < 18 14.15 Pass
Dividends Current yield > 2% 2.5% Pass
  5-year dividend growth > 10% 5% Fail
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 29.3% Pass
       
  Total score   4 out of 10

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

Since we looked at Boeing last year, the company hasn't improved on its 4-point score. The stock has gained about 10% in the past year, but the aircraft maker is at an inflection point in terms of where it may go from here.

Boeing is dealing with two completely different industry dynamics right now. On one hand, its defense business is under fire, with sequestration poised to rip a big hole in the government's defense budget. Although Lockheed Martin's (NYSE: LMT  ) fighter program may survive the cuts, General Dynamics (NYSE: GD  ) may not be so lucky, as its focus on naval vessels seems not to get as high a priority as aircraft.

On the other hand,