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.
Coca-Cola (KO 0.32%) has a simple business: satisfying its customers' thirst. But with the No. 1 brand in the world, the soft-drink giant continually works to enhance its image, earning it a spot among the Dow Jones Industrials (^DJI 0.61%). Yet even as the Dow has set new five-year highs, Coca-Cola's stock has held back since the summer as the company faces some ongoing challenges. Below, we'll revisit how Coca-Cola 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 Coca-Cola.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$169 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 |
0.50 |
Pass |
|
Worst loss in past five years no greater than 20% |
(24.1%) |
Fail | |
|
Valuation |
Normalized P/E < 18 |
22.97 |
Fail |
|
Dividends |
Current yield > 2% |
2.7% |
Pass |
|
Five-year dividend growth > 10% |
8.4% |
Fail | |
|
Streak of dividend increases >= 10 years |
50 years |
Pass | |
|
Payout ratio < 75% |
50.9% |
Pass | |
|
Total score |
7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Coca-Cola last year, the company has held onto its seven-point score for the third year in a row. The stock has managed to do a little better, picking up about 10% over the past year.
The beverage business involves a tale of two markets right now. Domestically, the mature market has made it extremely difficult for companies to find solid growth. PepsiCo (PEP 0.40%) managed to report a 2.5% increase in sales for its PepsiCo Americas Beverages unit by increasing spending on marketing and adding new products, but that growth figure includes some emerging-market exposure in Mexico. Meanwhile, Dr Pepper Snapple (DPS +0.00%) reported volume declines of 1% in its most recent quarter and warned that 2013 profits would come in below analyst expectations.
Internationally, though, the race is on to capture new markets. Both Coke and Pepsi are working hard to get into countries like India, where a rising middle class is poised to give the companies their best shot at building their customer base and encouraging beverage consumption. Yet in China, Coke has hit a wall and suffered a 4% decline in volume in the fourth quarter.
In Coke's most recent earnings report, one big worry was the fact that gross margins are at their lowest levels in the past decade, with rising commodity costs squeezing profits. Weakness in Europe was to be expected, given the economic problems there, but the company nevertheless needs to find ways to overcome those headwinds by exploring new avenues for growth.
For retirees and other conservative investors, a half-century of steadily increasing dividends has enriched long-term shareholders immensely. Despite Coca-Cola's growth challenges, its cash flow looks set to continue producing rich payouts well into the next half-century.
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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