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.
When the weather cooperates, the insurance business can seem like it's almost free money. Travelers
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 Travelers.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$23 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.69||Pass|
|Worst loss in past five years no greater than 20%||(13.8%)||Pass|
|Valuation||Normalized P/E < 18||29.11||Fail|
|Dividends||Current yield > 2%||2.8%||Pass|
|5-year dividend growth > 10%||9.5%||Fail|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||46.6%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Travelers last year, the company has dropped a point. Depressed earnings have pushed its P/E multiple well above where conservative investors like to see it.
Believe it or not, even in a year in which Travelers stock posted a decent return of 9%, 2011 was a terrible one for the insurer. With combined losses and expenses jumping well above premium income levels in late 2011, the company's bottom line has been under significant pressure.
Yet, Travelers stands out above some of its peers. It largely missed out on problems related to the Japanese earthquake and tsunami. Those problems hit both P&C rival MetLife
For retirees and other conservative investors, the big question is whether Travelers will get its earnings back up to pre-catastrophe levels. If it can, then it should be in a strong position going forward, as pricing will likely firm. Travelers still trades at well below the book-value multiple that rival Progressive
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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