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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
In the U.S., banks went through their toughest period four years ago, but for the most part, they've largely recovered from the financial crisis. For banks in the U.K. and Europe, however, the crises just seem to keep coming. HSBC Holdings
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 HSBC Holdings.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$168 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.76||Pass|
|Worst loss in past five years no greater than 20%||(38.6%)||Fail|
|Valuation||Normalized P/E < 18||14.74||Pass|
|Dividends||Current yield > 2%||3.9%||Pass|
|5-year dividend growth > 10%||(13.6%)||Fail|
|Streak of dividend increases >= 10 years||3 years||Fail|
|Payout ratio < 75%||40.9%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at HSBC Holdings last year, the company has kept its six-point score. The stock has held up quite well, though, rising about 25% over the past year.
British banks have had to deal with a lot of problems lately. The LIBOR rate-fixing scandal ensnared Barclays, forcing the resignation of CEO Bob Diamond, and has implications for more than a dozen other banks around the world, including HSBC, Bank of America
But HSBC's woes go further. In its most recent financial report, HSBC said it could have to pay out more than $2 billion to cover potential losses from inappropriate loan insurance sales and allegations of the bank allowing customers in Mexico and the U.S. to move funds without appropriate compliance guidelines.
As if that weren't bad enough, HSBC hasn't done a good job of making U.S. credit card customers happy. In the latest J.D. Power study, the bank got the absolute worst score among major card issuers, falling behind B of A and Capital One
For retirees and other conservative investors, it appears that HSBC still faces a lot of controversy. With so many other banks trading at equally attractive valuations, it seems far too early to count on HSBC avoiding losses from the European crisis and its own scandals. Prudent investors may prefer to look elsewhere for bank stocks for their retirement portfolios.
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.
HSBC is just one of many banks having to deal with challenges on multiple fronts. Bank of America is in much the same position, but it's fighting hard to keep its spot among top U.S. banks. Find out more about its struggle in the Fool's premium report on Bank of America. You'll get the inside scoop on the bank, including its competitive position against HSBC and others. Click here to get your report today.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Citigroup and Bank of America. 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.