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 and then examine whether Oracle
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. Many investors look for rapidly growing companies, but 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 quickly 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 Oracle.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$165.6 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||1.11||Fail|
|Worst loss in past five years no greater than 20%||(21.5%)||Fail|
|Valuation||Normalized P/E < 18||24.01||Fail|
|Dividends||Current yield > 2%||0.7%||Fail|
|5-year dividend growth > 10%||0.0%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||13.1%||Pass|
|Total score||4 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
A score of 4 makes it clear that Oracle doesn't give conservative investors everything they're looking for in a stock. But the company has quietly stood out from many of its tech rivals by executing well on its business strategy and avoiding the landmines that some competitors have stepped on.
Oracle is best known for its application software. But unlike Microsoft's
But that niche wasn't big enough for CEO Larry Ellison. Oracle's purchase of Sun Microsystems two years ago gave it the perfect entry into the hardware sector, setting up the company to go after IBM
Meanwhile, though, Oracle has had competitors try to flank its software strength. Cloud-based software companies such as salesforce.com
Oracle is huge, but its shares can be volatile. Most importantly for retirees and other conservative investors, the company has refused to commit to a dividend-paying philosophy, making only token payments over the past couple of years. Until that situation changes, you may want to pass on Oracle despite its impressive growth.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of IBM, Microsoft, and Oracle. Motley Fool newsletter services have recommended buying shares of Microsoft and salesforce.com, creating a diagonal call position on Microsoft, and shorting salesforce.com. We Fools don't 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.