While investors spend a lot of time trying to pick the right investments to build up the nest eggs that will support them in their golden years, once they actually become retirees, another conundrum surfaces. Namely, which stocks should you own in retirement?
At that stage of your life, it makes sense that you might want to minimize risk by holding shares of solid, industry-leading businesses that aren't overvalued. So we asked three top Motley Fool contributors to each pick a stock they believe fits those criteria. Read on to learn why they think retirees would be wise to buy Lowe's Companies (NYSE:LOW), Brookfield Infrastructure Partners (NYSE:BIP), and Express Scripts Holding Company (NASDAQ:ESRX).
Never stop (investing)
Steve Symington (Lowe's): As Lowe's popular tagline implies, if there's one thing that never stops, even -- and perhaps especially -- in retirement, it's home improvement. And in Lowe's, retirees are presented with a solid company that offers acceptable income growth and a 2.1% annual dividend yield.
This year, for example, its revenue is expected to climb 5%, including contributions from 35 new stores and solid 3.5% comparable-store sales growth. On the bottom line, Lowe's is expected to deliver 15.8% growth in adjusted earnings per share to $4.62.
We can also keep in mind that the latter number will be bolstered by Lowe's ambitious capital return efforts; it repurchased $1.2 billion in stock last quarter alone. What's more, Lowe's has long held a spot on the esteemed list of Dividend Aristocrats, having increased its dividend at least once every year since it became a public company in 1961.
With Lowe's shares trading at 15 times this year's expected earnings -- a reasonable premium given its earnings growth -- I think it's an attractive, stable portfolio candidate for investors in retirement.
A great value for a stable, dependable source of dividend growth
Jason Hall (Brookfield Infrastructure Partners): Since Brookfield Infrastructure is a master limited partnership, or MLP, it's not ideal to buy inside a tax-advantaged retirement account. But if you're already retired, or close to it and looking to build up a portfolio of stocks to pay steady income in a taxable account, this is absolutely one of my favorites.
To start, it's a solid value right now. It may look expensive, trading at almost 44 times the past year's earnings, but since a huge chunk of its assets is long-lived and real-estate based, this metric can be a bit misleading. The better metric to use when valuing this type of company is FFO, which is funds from operations. That backs out the non-cash depreciation and amortization expenses that Brookfield Infrastructure takes, even though many of its assets will actually increase in value over time.
When we measure Brookfield based on its price-to-FFO ratio, we get a much more reasonable 10.3 times the past year's funds from operations. For a stock that's yielding better than 4%, that's pretty cheap.
Here's what really makes it a great holding for retirees: Brookfield Infrastructure's assets are globally diverse, its cash flows are primarily under long-term (and inflation-indexed) contracts, and they are heavily recession-resistant things like power transmission lines, toll roads, ports, and other assets critical to modern life. This has allowed it to steadily grow its payouts since going public -- a trend that's set to continue for years to come.
A pharmacy benefits Titan under threat
Chuck Saletta (Express Scripts Holding Company): Talk about a painful one-two punch. Pharmacy benefits management company Express Scripts (NASDAQ:ESRX) has seen its shares tumble in recent months due to two major negative pieces of news.
First, it's expected to lose its relationship with its largest single customer by 2019, which will knock out about 30% of its earnings power. Second, a certain online retailing titan is making waves with moves that suggest it may enter the business of delivering prescription medications.
That double dose of risk naturally has investors jittery about the stock. Yet that's exactly why Express Scripts is currently a potential value stock retirees should consider. On the back of all that bad news, Express Scripts now trades at less than 8 times its expected earnings.
Even if it does lose around 30 percent of its earnings power in 2019 due to that projected loss of its key customer, Express Scripts is still trading at less than 12 times anticipated earnings after that loss. And that assumes that the company doesn't figure out a way to either cut costs or otherwise make up for part of that expected business loss.
Assuming the anticipated emerging competitive threat does materialize, that could add more risk to the picture, but even that would take a time to establish, especially in such a heavily regulated industry. Certainly, Express Scripts is facing risk and an uncertain future. But with as much pessimism as is already priced into its stock, it may very well turn out to be a bargain for today's investors.