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 McCormick
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 McCormick.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$5.9 billion||Fail|
|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||2 years||Fail|
|Stock stability||Beta < 0.9||0.42||Pass|
|Worst loss in past five years no greater than 20%||(13.8%)||Pass|
|Valuation||Normalized P/E < 18||18.65||Fail|
|Dividends||Current yield > 2%||2.5%||Pass|
|5-year dividend growth > 10%||9.7%||Fail|
|Streak of dividend increases >= 10 years||25 years||Pass|
|Payout ratio < 75%||37.1%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With its score of 6, McCormick could spice up a lot of conservative investors' portfolios. The Dividend Aristocrat has raised its payouts for a quarter-century, and throughout the financial crisis a few years ago, the stock held up better than many other companies did.
With over 120 years of history, McCormick is well-known in most households. The company makes many of the spices that grace kitchens everywhere. But what you may not realize is how big a presence McCormick has in the commercial food industry, with about 40% of sales coming from customers like restaurant-chain Yum! Brands
The food business has been kind to McCormick. Even as broader-based food companies like General Mills and ConAgra
But McCormick actually has some huge growth opportunities left to capitalize on. With only 39% of its total sales coming from overseas in 2010, McCormick has yet to tap into the big potential that emerging markets represent. With planned ventures in India and Poland, the company is making a start, but an obvious choice for expansion is Latin America and its spice-friendly culinary style.
As a small up-and-coming stock, McCormick isn't as big as many retirees and conservative investors like to hold in their portfolios. But with trends favoring its continued growth, the stock has made investors comfortable for years -- and should continue to do so in the future.
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 doesn't own shares of the companies mentioned. The Motley Fool owns shares of PepsiCo and Yum! Brands. Motley Fool newsletter services have recommended buying shares of McCormick, Yum! Brands, and PepsiCo, as well as creating a diagonal call position in PepsiCo. 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.