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.
Video games never go out of style, and among the companies that make them, Activision Blizzard (ATVI +0.00%) has one of the longest track records of successful game releases. But with a shift to mobile gaming and low-cost social-network games, Activision faces a challenge to its premium-game business model. How will the company respond? Below, we'll revisit how Activision Blizzard does on our 10-point scale.
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 Activision Blizzard.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$12.2 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 |
4 years |
Pass | |
|
Stock stability |
Beta < 0.9 |
0.56 |
Pass |
|
Worst loss in past five years no greater than 20% |
(41.8%) |
Fail | |
|
Valuation |
Normalized P/E < 18 |
19.59 |
Fail |
|
Dividends |
Current yield > 2% |
1.6% |
Fail |
|
5-year dividend growth > 10% |
NM |
NM | |
|
Streak of dividend increases >= 10 years |
2 years |
Fail | |
|
Payout ratio < 75% |
22.8% |
Pass | |
|
Total score |
5 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Activision Blizzard started paying a dividend in 2010. Total score = number of passes.
Since we looked at Activision Blizzard last year, the company's score has dropped by a point because its earnings multiple climbed. Yet that hasn't come from good stock performance; the shares have lost about 15% of their value in the past year.
Activision has done a good job of producing blockbuster games that keep on churning out sales. During this holiday season, its latest Call of Duty installment, Black Ops 2, continued the company's track record of top-selling video games.
But trends have gone against Activision for some time now. With console-makers seeing slow hardware sales, traditional video games don't seem to be drawing new buyers. That could change when Sony (SNE +0.10%) and Microsoft (MSFT +1.01%) release new consoles in the near future, but it's far from a sure thing. Still, with such a huge benefit from World of Warcraft and other non-console games, Activision has a huge edge over Electronic Arts (EA +0.01%) and Take-Two Interactive (TTWO +0.84%), both of which get the vast majority of their revenue from console-related game sales.
With that in mind, Activision should focus more on the competitive pressure that Zynga (ZNGA +0.00%) is putting on the industry. With its low-cost social games, Zynga is aiming to disrupt Activision's core business model, and although Zynga is struggling, Activision still needs to consider lower price points if it doesn't want to lose its edge.
For retirees and other conservative investors, relatively high valuations combined with a middling dividend don't add up to a very pretty picture for Activision Blizzard. Only if you believe that the company can be the ultimate winner in the industry would it make sense for most retirement investors to buy the stock.
Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help you improve your investing skills and teach you how to separate the right stocks from the risky ones.
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