Buying companies that have been mispriced by investors can be a sure-fire way to market-beating gains. Finding companies that are both a good value while minimizing risk for a retirement portfolio may seem like a daunting task, but it's easier if you know where to look.
With that in mind, we asked three top Motley Fool investors to choose companies they believed provided good value for retirees. They offered compelling arguments for Canadian National Railway Company (NYSE:CNI), Hormel Foods Corporation (NYSE:HRL), and Johnson Outdoors Inc. (NASDAQ:JOUT).
Danny Vena (Canadian National Railway Company): When investing for retirement, you could do worse than following the example set by legendary businessman Warren Buffet. In 2009, the Oracle of Omaha announced that Berkshire Hathaway Inc. (NYSE:BRK-B) (NYSE:BRK-A) would acquire Burlington Northern Santa Fe (BNSF), then the country's second-largest railroad, for a mind-boggling $34 billion.
Buffet later explained:
It is the most efficient way of moving goods in the country. It is the most environmentally friendly way of moving goods, and both those things are going to be very important ... it moves a ton of goods 470 miles on one gallon of diesel. It replaces -- a train replaces 280 trucks on the road.
He also said the industry is very capital-intensive and heavily regulated, which provides huge barriers to entry and a substantial competitive moat.
You can't buy BNSF, but you can follow Buffett's lead and add Canadian National Railway (CN) to you holdings. The company is the second largest publicly traded railroad in North American, with 20,000 miles of track connecting the East, West, and Gulf coasts. It also controls a strategic hub in the outerbelt around Chicago, which sees more than 25% of all rail traffic in the U.S. at some point in its journey.
CN has a record of increasing efficiency, having moved each ton of freight over 1,067 miles per gallon of fuel -- achieving a 20% improvement in fuel productivity over the last 10 years. The company also benefits from Prince Rupert port, the closest North American deep-sea port to Asia.
CN has a price to earnings ratio of just 14 times its trailing-12-month earnings -- significantly lower than the railroad industry's multiple of 25. The company also pays a dividend that yields 1.6%, and with a payout ratio of only 22%, there is a great deal of flexibility for increasing the dividend going forward.
In the fourth quarter of 2017, CN produced revenue that grew only 2% year over year, while net profit declined by 2%, the result of harsh weather conditions and higher fuel costs. These short-term conditions have created a great opportunity to buy a solid company at a value price.
Climb aboard before this train leaves the station!
Value is a relative thing
Reuben Gregg Brewer (Hormel Foods Corp): Hormel's price-to-earnings ratio is around 22 compared to a five-year average of nearly 24. Its price to book value is 3.7 versus an average of around 4. The price-to-sales ratio, however, is currently 2.1 compared to a five-year average of 1.7. There are some mixed signals there, but Hormel looks at least fairly priced today.
However, when you step back and examine the company's dividend yield, a more compelling picture emerges. Hormel's yield is currently around 2.1%, just a touch more than what you'd get from an S&P 500 Index fund. But the yield is toward the high end of the company's historical yield range. And, more interestingly, the spread between Hormel's yield and the market's yield is the widest it has been since the early 2000s. In other words, it looks like investors have put a for sale-sign on this protein-focused food manufacturer.
The relatively low valuation is because of legitimate concerns surrounding the changing buying habits of consumers. However, Hormel has a long history of successfully adjusting with the times. (That's highlighted by an incredible 52 consecutive years of annual dividend increases.) Most recently, that's included selling slow-growth businesses, like salt, and buying newer business that expand the company's global reach (South America's Ceratti brand), industry penetration (deli counter focused Columbus Craft Meats), and growth rate (Wholly Guacamole).
So, while there are legitimate concerns about the broader food business, I'm confident Hormel will manage to deal with the headwinds. Over time, I expect that to lead to a recovery from today's relatively cheap valuation and notable dividend growth over time.
Fishing for value
Rich Smith (Johnson Outdoors): What do people do in retirement? The picture of a septuagenarian retiree sitting peacefully by the lake, fishing pole in hand, is the first cliche that springs to mind. And maybe that is how folks spend their retirement -- relaxing and enjoying the fly-fishing lifestyle. Or maybe it's not. I plan to retire in a decade or so myself, so maybe I'll find out then.
What I know right now is that if you are planning to retire in the near future, Johnson Outdoors looks like a nice, safe stock to invest in -- and one that could generate some profits to help pay for those fly-fishing trips.
A small-cap manufacturer of outdoor sporting goods, Johnson produces all sorts of useful gear for fishermen, from boats and boat motors to GPS and fish-finding equipment. Johnson even makes tents, camp stoves, and camping furniture for overnight fishing expeditions. If fishing and camping play any part in your retirement plans, you could acquire a lot of familiarity with Johnson's products very soon.
In the meantime, Johnson's valuation looks attractive for anyone who wants to put money to work in the market while awaiting retirement. The stock only costs about 14.5 times trailing earnings, and analysts think it has a good chance of growing those earnings at 15% or so annually over the next five years. Throw in a modest 0.6% dividend yield, and the company's total return ratio (P/E, divided by the sum of growth plus dividend yield) is comfortably below 1.0. And with a dividend payout ratio of only 10%, Johnson has lots of room to grow that dividend as the years go by.
I think it's a fine value stock to invest in when planning for retirement.