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.
In order to build popular technological devices, ranging from computers to mobile devices, companies need to be able to produce the semiconductor chips and other components that go into them. Applied Materials (AMAT +1.05%) makes the machinery that allows its customers to produce those components. But even with the huge volumes of devices coming onto the market, Applied Materials faces substantial competition. Can the company recover from a lackluster year? Below, we'll revisit how Applied Materials 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 Applied Materials.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$12.8 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 |
1.22 |
Fail |
|
Worst loss in past five years no greater than 20% |
(42.1%) |
Fail | |
|
Valuation |
Normalized P/E < 18 |
22.96 |
Fail |
|
Dividends |
Current yield > 2% |
3.5% |
Pass |
|
5-year dividend growth > 10% |
8.8% |
Fail | |
|
Streak of dividend increases >= 10 years |
3 years |
Fail | |
|
Payout ratio < 75% |
398.2% |
Fail | |
|
Total score |
2 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Applied Materials last year, the company has lost four full points, with plunging revenue, earnings, and free cash flow all adding up to big problems. The stock hasn't done quite as badly as the falling score would suggest, but it's still down 5% over the past year.
The semiconductor equipment space has been a challenging one lately, and Applied Materials isn't the only one that has suffered as a result. Lam Research (LRCX +1.29%) has seen margins contract severely, while KLA-Tencor (KLAC +0.55%) trades near 52-week lows despite its dominance of the process, diagnostics, and control-market niche.
For its part, Applied Materials has historically relied on Taiwan Semiconductor (TSM +0.47%) and United Microelectronics (UMC 0.86%) as major customers to keep orders for equipment coming in. Yet Applied Materials warned about a shortfall in orders for the year back in July, and so far, it hasn't recovered. Moreover, with Lam having bought Novellus Systems, Applied Materials will have an even tougher time keeping up with the competition.
In its most recent quarter, Applied Materials beat estimates, but it gave a downbeat assessment of the equipment market for its full 2013 fiscal year. With the weakness in PC sales, the company faces yet another obstacle to overcome as the technology industry increasingly moves toward mobile devices.
For retirees and other conservative investors, Applied Materials pays a healthy dividend, but earnings weakness has called its sustainability into question. Profits are likely to rise somewhat, but in the long run, you may be better served looking for other ways to play the mobile revolution in your retirement portfolio.
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.
Add Applied Materials to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
