Value stocks are generally defined as those that trade for attractive valuations relative to their peers. They also tend to be stable and well-established companies, which makes many value stocks excellent choices for retirees. With that in mind, here are two value stocks our Foolish investors think retirees should take a closer look at: AT&T (T -1.66%) and Vista Outdoor (VSTO -1.24%).
A steady high dividend and long-term growth potential
Matt Frankel (AT&T): AT&T is perhaps my all-around favorite stock for retirees, and since the stock has dropped 16% in 2017 and now yields more than 5.5%, it could be a smart time for income-seeking investors to add it to their portfolio.
Because its main business produces a reliable stream of utility-like income, the company's earnings (and its stock price) tend to be significantly less volatile than average. After all, when times get tough and people need to cut back on expenses, there are few things that will take priority over maintaining mobile-phone service.
Thanks to its acquisition of DIRECTV, it has lots of possibilities for future customer acquisition by being able to bundle services together. And its pending acquisition of Time Warner will give AT&T a ton of content that it can broadcast directly to customer's smartphones and tablets. In addition, AT&T is rolling out its 5G wireless network in 20 markets this year, which will supposedly have twice the data speed of the current 4G LTE networks.
Finally, one major concern for retired investors is having an income stream that keeps up with inflation, and not only does AT&T pay a high dividend, but its payout also grows consistently over time. In fact, AT&T is a member of the S&P 500 Dividend Aristocrats index, as it has raised its payout for 33 consecutive years.
This profitless stock looks like a bargain
Rich Smith (Vista Outdoor): When you think about "value stocks," what's the first thing that comes to mind? A low P/E ratio, right? Well what would you say if I told you one of the best value stocks for retirees to look at today is a stock with no P/E ratio, and no profits at all?
With $287 million in GAAP losses racked up over the past year, Vista Outdoor is not the kind of stock that will be first on most value investors' shopping lists, but that doesn't mean it isn't a bargain. Most of Vista's losses, you see, were racked up in just one quarter last year, when Vista warned that it would be taking a "material, non-cash intangible asset impairment charge" to earnings for its fiscal third quarter 2017, to account for weak sales in its hunting and shooting accessories business.
Ever since recording that charge, though, Vista has been reporting profits. More importantly, it's been generating real cash profits both before, during, and after the big Q3 GAAP disaster. As a result, while Vista Outdoor stock is still showing negative earnings and a negative P/E, it's nonetheless generated real cash profits (free cash flow) of nearly $130 million over the past year. Weighed against the stock's $1.2 billion market capitalization, this gives Vista Outdoor stock a price-to-free cash flow ratio of less than 10 -- which I'd argue is a bargain price.
Investors who buy Vista today can count on long-term earnings growth rates of as much as 25% annually, say Wall Street analysts. Buying low today, then sitting back and watching Vista stock grow over time, would, I think, be a great way to spend a long and profitable retirement.