If you are looking to build a stock portfolio for your retirement, you are probably looking to invest in companies with decent and growing dividends and shareholder-friendly management. In addition, it's obviously a good idea to invest in rock-solid industries that are unlikely to disappear in 20 years' time. In that line of thought, railroad Union Pacific (NYSE:UNP) and Dividend Aristocrats Hormel Foods (NYSE:HRL) and Lowe's (NYSE:LOW) are good candidates to add to your nest egg.
Railroads are the lifeblood of the industrial economy. As long as there's a need to move goods from place to place, there will be a need for railroads, so Union Pacific is likely to be around for many decades to come. Moreover, the fact that the railroads own their own infrastructure means they act as effective oligopolies within their geographic regions. For example, Union Pacific and BNSF dominate the West Coast, while CSX and Norfolk Southern are the leading players on the East Coast.
Not only does Union Pacific have a very strong market position, but it also has growth opportunities. For example, it might win business from the trucking industry as a result of improving metrics such as trip plan compliance (percentage of shipments on time). In addition, the railroad is implementing a set of management techniques known as precision scheduled railroading, or PSR, to increase profitability. PSR allows railroads to run the same carload volumes but with fewer assets through measures like running locomotives on fixed schedules from point to point on a network, as opposed to the traditional hub-and-spoke method.
The implementation of PSR appears to have improved an already impressive trend of margin improvement, and as you can see below, the company's current $3.88-per-share dividend (yielding 1.9%) is well covered by free cash flow.
All told, Union Pacific offers a mix of security and earnings growth potential with a well-covered dividend. Those are good qualities for a stock in your retirement portfolio to have.
The food industry is often seen as an ideal arena for risk-averse investors. However, since the coronavirus pandemic began, investors have had to rethink part of that thesis, because many food companies sell into the food-service market, and the pandemic has not been kind to the sector. In fact, Hormel tends to generate around 30% of its sales from the U.S. food-service market, and those sales were down a whopping 23% in the recently reported fourth quarter.
That said, the company's U.S. retail net sales rose 7% in the quarter, and overall net sales were down just 3%. That's a decent result under the circumstances, and it should be noted that Hormel's other two end markets (U.S. deli and international) both reported net sales increases in the fourth quarter. And investors can, we hope, look forward to a recovery in food-service sales next year. Meanwhile, the company continues to invest in its collection of protein-based food brands.
Hormel is a conservatively run company with very little debt -- just as you'd expect from a company with a high level of ownership from the founder's heirs. In addition, it's a Dividend Aristocrat (current yield 2.1%) with a 55-year history of raising its dividend per share, and despite the hiccup in 2020 with U.S. food-service sales, it's still a safe bet for conservative investors.
Last but not least, the second-largest home-improvement company in the U.S. is well worth a look. This Dividend Aristocrat (current yield 1.6%) has had one of the most interesting years of all the major retailers. While it's well known that the pandemic and stay-at-home measures have boosted demand for home-improvement activity -- Lowe's U.S. comparable sales increased an incredible 30.4% in the third quarter -- it's less well understood that this came at a good time for the company strategically.
In short, Lowe's entered 2020 in the second year of a multiyear turnaround strategy being implemented by CEO Marvin Ellison. The hope is that Ellison will turn around the business and achieve the same kind of margin and cost base as its great rival, The Home Depot (NYSE:HD) -- a company Ellison knows well due to his 12-year stint there, which ended at VP level in 2014.
As you can see below, the gap in performance between Lowe's and Home Depot does appear to be narrowing.
Moreover, the boost to earnings created by the pandemic is easing the turnaround pathway and, in particular, enabling investment in improving Lowe's professional contractor and e-commerce niches. So Lowe's is well-positioned to continue to play catch-up to Home Depot and benefit from the long-term demand for home improvement.