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.
If you want to get something from here to there, UPS (NYSE: UPS) has long been a useful alternative to the post office. With the big increase in Internet-based sales, UPS has been able to capitalize on rising delivery volumes from the space, counteracting in part losses from the recession. But with fuel prices high, can UPS keep delivering solid returns to investors? Below, we'll revisit how UPS 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 UPS.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $77.1 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 | 2 years | Fail | |
| Stock stability | Beta < 0.9 | 0.83 | Pass |
| Worst loss in past five years no greater than 20% | (19.7%) | Pass | |
| Valuation | Normalized P/E < 18 | 22.20 | Fail |
| Dividends | Current yield > 2% | 2.8% | Pass |
| 5-year dividend growth > 10% | 6.5% | Fail | |
| Streak of dividend increases >= 10 years | 3 years | Fail | |
| Payout ratio < 75% | 52.5% | Pass | |
| Total score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at UPS last year, the company has kept the same six-point score. But the company has some exciting initiatives on the horizon that could move the needle going forward.
With its reasonably priced delivery service, UPS has been a prime beneficiary of the woes at the U.S. Postal Service. UPS offers shipping at price points that are often less expensive than rival FedEx (NYSE: FDX), and it has a strong relationship with online retail giant Amazon.com (Nasdaq: AMZN), which saw a big upsurge in traffic during the most recent holiday season. With FedEx having raised its shipping rates this year, UPS could get even more business from cost-conscious customers.
But fuel costs remain a concern. It's easy to understand how Southwest Airlines (NYSE: LUV) and its peers take a hit with expensive fuel, but you might forget that UPS has an immense fleet of planes and trucks to get things from point A to point B. UPS has instituted fuel surcharges to help it manage costs, but it's still a constant threat to profitability. Still, its deal with Union Pacific (NYSE: UNP) whereby the railroad helps with freight delivery is one way the company tries to minimize fuel expenses.
Earlier this week, UPS announced it would buy TNT Express, paying $6.8 billion for the Dutch carrier. The acquisition will bolster UPS' position as the world's largest international shipper and take advantage of weak conditions in Europe to make a strong long-term addition to its business.
For retirees and other conservative investors, the good news is that UPS continues to deliver healthy dividends and has been boosting its payout recently. Shares are a bit pricey, though, so you may prefer to hold off on adding UPS to your retirement portfolio until you can get a slightly cheaper price.
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.
If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
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