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.
Few industries inspire more discord among investors than tobacco manufacturers. With the specter of litigation hanging over their shoulder, many investors shun big tobacco entirely. Yet when Altria
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 Philip Morris International.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$155 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||4 years||Pass|
|Stock stability||Beta < 0.9||0.86||Pass|
|Worst loss in past five years no greater than 20%||(9.1%)*||Pass|
|Valuation||Normalized P/E < 18||19.40||Fail|
|Dividends||Current yield > 2%||3.4%||Pass|
|5-year dividend growth > 10%||13.7%*||Pass|
|Streak of dividend increases >= 10 years||4 years||Fail|
|Payout ratio < 75%||56.2%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Since spinoff in March 2008.
Since we looked at Philip Morris International last year, the company has kept its eight-point score. The stock has soared nearly 30% in the past year, though, as dividend-hungry investors are increasingly willing to accept more risk to get bigger payouts.
Philip Morris has managed to deliver on much of its promise to give investors all the upside of tobacco without as much of the downside. Most recently, American regulators have clamped down on big tobacco with a CDC ad campaign targeted at getting people to quit smoking, even as the industry has thus far avoided an FDA initiative to force cigarette makers to put huge warnings on its packs. That has put Altria, Reynolds American
Still, Philip Morris isn't completely immune from regulation. Australia has tried to put similar regulations on the company as well as fellow foreign rival British American Tobacco
For retirees and other conservative investors, the dangers of being in a risky industry have only risen as the stock's earnings multiple has climbed. Even with a lucrative dividend, Philip Morris shares at almost 20 times earnings aren't the bargain they once were and leave relatively little margin of safety if something goes wrong in the industry.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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.