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.
It doesn't seem like so long ago that when it absolutely, positively had to be there overnight, FedEx
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 FedEx.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$26.1 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||1 year||Fail|
|Stock stability||Beta < 0.9||1.25||Fail|
|Worst loss in past five years no greater than 20%||(27.7%)||Fail|
|Valuation||Normalized P/E < 18||16.45||Pass|
|Dividends||Current yield > 2%||0.6%||Fail|
|5-year dividend growth > 10%||8%||Fail|
|Streak of dividend increases >= 10 years||10 years||Pass|
|Payout ratio < 75%||10%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only five points, FedEx lacks some of the reassuring characteristics that conservative investors prefer to see from their stocks. Despite solid results on the bottom line, the delivery company has had less dependable free cash flow and doesn't pay the dividends that many retirees depend on.
FedEx has refined its delivery business into a highly profitable machine. As fellow Fool Sean Williams observed last month, FedEx beats rival United Parcel Service
In a slow economy, though, FedEx faces other threats. Airlines like Delta Air Lines
But one bright spot may come from the holiday season. Reports indicate that truckers' fuel purchases during the third quarter fell sharply, suggesting fewer shipments via trucking companies like Swift Transportation
The biggest problem for retirees and other conservative investors is FedEx's insignificant dividend. Although proponents argue that its low payout ratio gives FedEx more flexibility to direct capital to where it will benefit shareholders most, a 10-year history of raising dividends annually is a good start to what will hopefully become a more lucrative proposition for investors. Despite the stock's shortcomings, many retirement investors may want to turn to FedEx for the long haul.
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.
Add FedEx to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.
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 in this article. The Motley Fool owns shares of FedEx and United Parcel Service. Motley Fool newsletter services have recommended buying shares of FedEx. 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.