Investing in stocks during retirement might seem risky, but it doesn't have to be if you select the market's best businesses. So how do you identify those businesses?
With the caveat that you should always do your own research, one great place to look is in the portfolios of some of the world's wealthiest people. To start you off, we asked three top Motley Fool investors to each discuss a billionaire stock that they believe retirees would be wise to purchase today. Read on to learn why they chose Restaurant Brands International (QSR 0.79%), General Motors (GM -3.30%), and Bank of America (BAC -2.02%).
Tasty returns for years to come
Steve Symington (Restaurant Brands International): As the parent company of Burger King, Tim Hortons, and Popeyes Louisiana Kitchen -- the last of which it acquired for $1.8 billion earlier this year -- Restaurant Brands International boasts an enviable portfolio of dining concepts that any retiree can appreciate. And of course, they can sleep well knowing that as of mid-August, among its largest shareholders are Bill Ackman's Pershing Square, with a 12.5% stake worth nearly $2 billion as of this writing; Warren Buffett's Berkshire Hathaway, which holds an 11.6% position worth more than $1.8 billion; and Jorge Lemann's 3G Capital, which holds a commanding 42.5% stake.
To be fair, Restaurant Brands International has treated its investors to some delicious gains by rising almost 40% so far in 2017 -- but with good reason. As many of its brands' fast-food peers struggle to find growth, last quarter RBI saw sales climb 8.9% year over year to $1.133 billion, helped by the inclusion of Popeyes (the integration of which it has yet to finish), hearty 3.9% comparable-sales growth at Burger King, and steady new-restaurant growth for all three chains. On the bottom line, that translated to impressive 24.4% growth in adjusted earnings per share to $0.51 as profitability for each chain continued to improve. As a result, the stock's price looks much more reasonable, below 26 times this year's expected earnings, and Restaurant Brands' solid dividend yields 1.2%. All told, the stock should be poised to continue serving up market-beating growth.
A stock that two billionaire investors agree on
Sean O'Reilly (General Motors): One of the best ways to find great investment ideas is to follow the moves of billionaires. After all, these individuals have expertise and knowledge few possess, and it is this edge that is often the source of their wealth. As of June 30, 2017, one of the world's most successful investors, David Einhorn, had a whopping 54.75-million-share stake in General Motors. The investment, worth some $2.46 billion at GM's current share price, is echoed by none other than Warren Buffett. A quick glance at the company's recent results and valuation tells the tale. Since the Great Recession, GM has emerged as a fantastic business exhibiting traits of particular interest to retirees.
Under the leadership of CEO Mary Barra, General Motors has entered a renaissance. Last year revenue came in at $157 billion, up from $145.9 billion in 2015. Profits came in at $9.4 billion, or $6 per share. More importantly for a company that was bailed out by the federal government less than a decade ago, cash from operations came in at $21.4 billion. Capital expenditures amounted to $11.4 billion, yielding investors a healthy $10 billion in free cash flow. GM is using profits to invest in the future and reward investors. Through strategic investments in things like ridesharing app Lyft, share buybacks, and dividends (GM currently yields 3.36%).
Though we are likely at the top of the automotive sales cycle, analysts polled by S&P Global Market Intelligence expect profits to stay steady through the decade. There is a silver lining to GM's lackluster growth: Its shares currently trade at a rock-bottom forward P/E ratio of 8.3 and sport an above-average yield. It's also worth noting that GM is experiencing strong results in China -- an enormous market that could be a big deal for GM in the years ahead. Retirees could do a lot worse than follow David Einhorn into GM stock.
Returns retirees can bank on
Sean Williams (Bank of America): Despite rising by more than 400% since 2011, one so-called "billionaire stock" that I believe should be on the radars of retirees is Bank of America.
Currently, the greatest buy-and-hold investor of our time, Warren Buffett, owns 700 million shares of Bank of America, working out to 6.63% of its outstanding share count. What Buffett sees in B of A is the same thing I see as a longtime shareholder: the expectation of net interest margin and profit expansion.
The key catalyst working in Bank of America's favor is the Federal Reserve and its ongoing monetary tightening. Actions by the Fed to lift the federal funds target rate, and thus interest rates, by a quarter point on four separate occasions since Dec. 2015 have put extra revenue into Bank of America's pockets. You see, no banking giant stands to benefit more from a 100-basis-point increase in short- and long-term rates than Bank of America. As my Foolish colleague John Maxfield noted in September, a 100-basis-point increase in short- and long-term rates would yield an estimated $3.2 billion in additional net interest income.
However, the Fed's long-run plan could push rates up an additional 200 basis points before this cycle of monetary tightening is complete, suggesting that well over $3 billion could be created in additional net interest income.
Retirees also shouldn't overlook just how far B of A has come in terms of putting its demons in the rearview mirror. It wound up paying out more than $60 billion in mortgage-related settlements tied to the Great Recession, but is now producing considerably cleaner quarters that allow for simpler apples-to-apples comparisons.
Not only are we seeing less in the way of litigation and settlements dragging down operating results, but the company has far more capital on hand in case of an economic downturn, and its dividend has been catapulted higher to a nearly 2% yield. Retirees looking for a way to generate income and see their investment appreciate in value would be wise to take a closer look at Bank of America.