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.

We all know just how badly banks in the U.S. got beat up during the financial crisis. But elsewhere in the world, other countries had their own unique problems to handle. For Australia's Westpac Banking (NYSE: WBK), the combination of higher interest rates and a resource-based economy gave it a much different environment to navigate during the crisis. Three years later, is Westpac on track to keep recovering? Below, we'll look at how the company 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 Westpac Banking.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $61.6 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 2 years Fail
Stock stability Beta < 0.9 0.57 Pass
Worst loss in past five years no greater than 20% (48.7%) Fail
Valuation Normalized P/E < 18 12.10 Pass
Dividends Current yield > 2% 7.8% Pass
5-year dividend growth > 10% 6.1% Fail
Streak of dividend increases >= 10 years 2 years Fail
Payout ratio < 75% 53.6% Pass
Total score 6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With a score of six, Westpac doesn't have everything conservative investors want in a stock, but it's definitely worth a closer look. The bank's extremely high dividend yield compares very favorably to U.S. counterparts Citigroup (NYSE: C) and Bank of America (NYSE: BAC), which have had to keep their payouts low to bolster their capital reserves.

The banking environment in Australia is even more top-heavy than U.S. investors are used to at home. Although JPMorgan Chase (NYSE: JPM), B of A, Citi, and Wells Fargo (NYSE: WFC) all have more than $1 billion in total assets, nearly two dozen banks weigh in with assets of $100 million or more. By contrast, a group of four banks, including Westpac, ANZ, National Australia, and Commonwealth Bank, thoroughly dominates the Australian banking market.

The island continent has benefited from its natural resource riches. Companies such as BHP Billiton (NYSE: BHP) have benefited from exporting minerals and energy products to hungry emerging economies, especially China.

Unfortunately, Westpac and its banking peers have had to deal with a housing market that's just as precarious as U.S. housing has been in recent years. Analysts expect price declines of 5% to 10% for Australian residential real estate in 2012, and with their high exposure to mortgage loans, that could spell trouble for banks.

For retirees and other conservative investors, the fact that Westpac has come back from dividend cuts two years ago to restore its payout to above its pre-crisis level is an encouraging sign. But with another shoe to drop in Australian housing, investors may want to wait awhile before adding Westpac to their retirement portfolios.

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 improve your investing skills, and teach you how to separate the right stocks from the risky ones.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.