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.
Health insurance is a key component of everyone's financial plan. In that context, Aetna
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 Aetna.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $12.7 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 | 1.21 | Fail |
| Worst loss in past five years no greater than 20% | (50.5%) | Fail | |
| Valuation | Normalized P/E < 18 | 7.39 | Pass |
| Dividends | Current yield > 2% | 1.8% | Fail |
| 5-year dividend growth > 10% | 76.0% | Pass | |
| Streak of dividend increases >= 10 years | 2 years | Fail | |
| Payout ratio < 75% | 12.7% | Pass | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Aetna last year, the company has kept its five-point score. Yet the stock has managed to pick up about 5% in the past year, despite having lost much more substantial gains from earlier in 2012.
Health insurers in general have had some problems in dealing with the new requirements of recently enacted health-care-reform laws. Larger competitors UnitedHealth Group
But Aetna in particular has had its own unique issues. In April, for instance, the company saw its medical cost ratio rise more than two percentage points to 81.5% and missed earnings expectations by a wide margin. Given that UnitedHealth and WellPoint both managed to beat expectations and raise full-year-earnings guidance, shareholders responded by punishing the stock.
Now that the Supreme Court has upheld most of the new health-reform laws, Aetna can look forward to a bigger pool of prospective customers, but with them will come increased competition. In addition, Aetna will have to return some of its profits in the form of rebates to customers, as will peers Coventry Health Care
For retirees and other conservative investors, all the uncertainty involved with Aetna has pushed its valuation down to extremely low levels. The question, though, is whether growth will help the stock rebound. At this point, few things are certain, but risk-tolerant investors may want to take their chances on a recovery and the substantial stock gains that Aetna could enjoy if it emerges a winner.
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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