Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Norfolk Southern
The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.
Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.
When scrutinizing a stock, retirees should look for:
- Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
- Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
- Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
- Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
- Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.
With those factors in mind, let's take a closer look at Norfolk Southern.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$25.9 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||4 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||1.03||Fail|
|Worst loss in past five years no greater than 20%||(4.8%)||Pass|
|Valuation||Normalized P/E < 18||17.64||Pass|
|Dividends||Current yield > 2%||2.3%||Pass|
|5-year dividend growth > 10%||23.9%||Pass|
|Streak of dividend increases >= 10 years||10 years||Pass|
|Payout ratio < 75%||34.4%||Pass|
|Total score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Norfolk Southern runs the rails with a score of 8. The railroad company has not only delivered the consistent growth and income that conservative investors crave but has also ridden a wave of commodity-related activity that has bolstered its recent results.
The aftermath of the recession was extremely hard on Norfolk Southern, which saw big contractions in revenue and free cash flow in 2009. But shares held steady, and the company bounced back last year with strong growth in earnings.
Increasingly, rail companies have identified coal as a future growth play, with rival CSX
Expensive oil also supports the rail companies by giving them a greater efficiency advantage over trucking. FedEx's
It's easy to dismiss Norfolk Southern as a stalwart from a long-gone age. But railroads are here to stay, and just as Warren Buffett's Berkshire Hathaway
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.
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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.
Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. The Fool owns shares of Berkshire Hathaway and FedEx, which are Motley Fool Stock Advisor picks. Berkshire Hathaway is also a Motley Fool Inside Value recommendation. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.