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 measurements to show what makes a great retirement-oriented stock.
Rags-to-riches stories get a lot of press, given the wealth they create for investors. But Nokia (NYSE: NOK) represents the opposite side of the coin, a true riches-to-rags story featuring a company that once stood atop the entire world mobile-phone market. With the advent of smartphones, however, Nokia has found itself behind the curve, and recent efforts to catch up thus far haven't borne fruit. Can the Finnish giant get to the finish line? Let's take a look at how Nokia 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 Nokia.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $11.4 billion | Pass |
| Consistency | Revenue growth > 0% in at least four of five past years | 2 years | Fail |
| Free cash flow growth > 0% in at least four of past five years | 2 years | Fail | |
| Stock stability | Beta < 0.9 | 0.89 | Pass |
| Worst loss in past five years no greater than 20% | (58.8%) | Fail | |
| Valuation | Normalized P/E < 18 | NM | NM |
| Dividends | Current yield > 2% | 8.5% | Pass |
| 5-year dividend growth > 10% | (14.2%) | Fail | |
| Streak of dividend increases >= 10 years | 0 years | Fail | |
| Payout ratio < 75% | NM | NM | |
| Total score | 3 out of 8 |
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
With only 3 points, Nokia doesn't give retirees and other conservative investors much of what they like to see in a stock. What appears to be a strong dividend actually results largely from the huge plunge in the company's shares recently, as prospects for the mobile giant have continued to dim.
In the mobile-device business, there've been big winners and big losers, without a whole lot of in-between. Just as former corporate-smartphone leader Research In Motion (Nasdaq: RIMM) has fallen out of favor because of its failure to keep up with the pace of innovation elsewhere in the industry, Nokia also came out on the short end of the stick, as it finally lost its global leadership position to Samsung earlier this year. More importantly, while Apple (Nasdaq: AAPL) and several manufacturers using the Google Android operating system have rushed in to grab a huge portion of the higher-margin smartphone market, Nokia has languished behind in the high-growth area.
Nokia's partnership with Microsoft (Nasdaq: MSFT) was supposed to change all that. But the release of the Lumia didn't go nearly as well as the company had hoped. Now, Nokia is pinning its hopes on its new Lumia phones, which run on Microsoft's new Windows Phone 8 operating system. But even there, Samsung is crashing the party, beating Nokia to the punch with a Windows-OS phone of its own.
For retirees and other conservative investors, Nokia is an incredibly speculative value play right now. On its face, it's extremely inexpensive, with net cash making up more than half its market capitalization. But until the company demonstrates it can survive in a tough industry environment, it's far too risky for most retirement portfolios.
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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