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.
Lately, the battle for intellectual property has heated up. There have always been fights over patent infringement, but many companies are now takeover targets purely because of their patent portfolios. By that metric, Qualcomm (Nasdaq: QCOM) is one of the most valuable companies in the U.S., with an extensive set of patents that cover wireless technology of all types and levels of advancement. But with the mobile revolution evolving at a breakneck pace, can the company keep up with its competitors? Below, we'll revisit how Qualcomm 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 Qualcomm.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $96 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 | 3 years | Fail | |
| Stock stability | Beta < 0.9 | 0.98 | Fail |
| Worst loss in past five years no greater than 20% | (7.6%) | Pass | |
| Valuation | Normalized P/E < 18 | 24.66 | Fail |
| Dividends | Current yield > 2% | 1.8% | Fail |
| 5-year dividend growth > 10% | 12.4% | Pass | |
| Streak of dividend increases >= 10 years | 10 years | Pass | |
| Payout ratio < 75% | 25.3% | Pass | |
| Total score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Qualcomm last year, the company has gained a point. A longer string of dividend increases boosted the score, but more impressive is its solid share-price performance over the past year.
If you own a smartphone, odds are good that you use Qualcomm's chips. Major smartphone makers from Nokia's (NYSE: NOK) new Lumia phones to Samsung and Motorola get key components from Qualcomm.
In its most recent quarter, Qualcomm posted impressive results, but shareholders seemed unsatisfied as the company gave weaker guidance for the coming quarter. In particular, news of a potential supply shortage for chips that could be destined for Apple's (Nasdaq: AAPL) iPhone 5 as well as other popular smartphones could cause short-term disruptions, although Qualcomm is taking steps to fix the problem quickly.
The big concern for Qualcomm is how well NVIDIA (Nasdaq: NVDA) will do with its rival chips. Companies are building around NVIDIA's Tegra 3 processor, although in some cases, they substitute Qualcomm chips like Snapdragon in order to maintain compliance with their network standards. Still, with Verizon and AT&T now consistently using 4G LTE networks, Qualcomm is in a strong position with its status as leader in the baseband modem area, easily outpacing Intel (Nasdaq: INTC) and other rivals.
For retirees and other conservative investors, Qualcomm's dividend growth has been slow but steady, and shares have held up well even during downturns. As long as mobile growth continues, Qualcomm looks like a smart way to play the trend.
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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