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.
As the largest credit card network in the world, Visa (V +0.92%) has revolutionized the way we pay for things. Yet just as credit and debit cards have sought to replace the check as the primary vehicle for making payments, Visa now has to deal with the onset of payment systems that use mobile devices rather than physical plastic cards. With huge competition threatening its dominance, will Visa keep standing tall? Below, we'll revisit how Visa 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 Visa.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$91.3 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 |
4 years |
Pass | |
|
Stock stability |
Beta < 0.9 |
0.77 |
Pass |
|
Worst loss in past five years no greater than 20% |
(19%)* |
Pass | |
|
Valuation |
Normalized P/E < 18 |
24.00 |
Fail |
|
Dividends |
Current yield > 2% |
0.6% |
Fail |
|
5-year dividend growth > 10% |
20.3%* |
Pass | |
|
Streak of dividend increases >= 10 years |
3 years |
Fail | |
|
Payout ratio < 75% |
40.5% |
Pass | |
|
Total score |
7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes. * Since going public in 2008.
Visa scores seven points, showing that it has much of what conservative investors like to see in a stock. Although the stock's yield is low and its valuation is somewhat rich, Visa has rewarded shareholders well over the past year with a nearly 50% gain over the past year.
Visa has been flying high lately, as the global move away from cash transactions and toward electronic payments has taken hold. With Visa taking a cut of these transactions, scale matters, and Visa's commanding lead over MasterCard (MA +2.11%) and competing card networks gives it a huge advantage.
But as technological innovation continues to move forward, mobile payments are the next big thing. Visa is working hard to protect itself from losing its leadership position, but eBay's (EBAY +0.08%) PayPal, which recently joined forces with Discover Financial (DFS +0.00%) to offer PayPal-based payments in stores that accept Discover's card, poses a significant threat.
Moreover, Visa is dealing with some legal trouble. Even though Visa and MasterCard have agreed in principle to a $6 billion settlement of fee-fixing allegations, major retailers aren't satisfied with the remedies under the settlement. As long as so-called swipe fees aren't competitively set, retailers argue that there's no guarantee that they won't rise precipitously.
Visa is also going through a big leadership change, with Charles Scharf coming over from JPMorgan Chase (JPM +0.84%) to take over as CEO for Joseph Saunders. At JPMorgan, Scharf previously ran the division that oversaw the bank's credit card issuance, so he has plenty of experience with the card business.
For retirees and other conservative investors, Visa is going through a major transition right now. If it can successfully navigate into the new mobile-payments world, then Visa could have a whole lot more growth left in it -- exactly the kind of investment that many investors would like in their 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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