Will British American Tobacco Help You Retire Rich?

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.

The tobacco industry in the U.S. has come under fire from federal regulators, health advocates, and local governments, making the business a dangerous one for domestic players. But overseas, the industry has faced fewer challenges, and British American Tobacco (BTI 0.51%) has sought to make the most of the favorable environment. But will the good times last? Let's revisit how British American Tobacco 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 British American Tobacco.

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at British American Tobacco last year, the company hasn't been able to regain either of the two points it lost from 2011 to 2012. The stock has also had only modest gains of less than 5% over the past year.

For U.S. investors, the idea of escaping negative American attitudes toward tobacco seems extremely inviting. U.S. giants Altria (MO 0.70%) and Reynolds American (RAI) have had to announce layoffs in response to falling domestic demand for cigarettes and other tobacco products, as anti-smoking actions from the FDA and the Centers for Disease Control appear to be having an impact among customers.

But the overseas environment is also moving against British American Tobacco and its peers. In Australia, British American and Philip Morris International (PM 3.83%) have had to deal with proposals to limit the use of logos and graphics on cigarette packs, instead requiring uniform box designs with large warnings and pictures showing the impact of diseases that have been linked to smoking. Other countries, such as New Zealand, Canada, India, and the U.K., are watching to see what happens to the Australian proposal, raising the possibility that it could become a testing ground for further worldwide regulatory efforts.

For retirees and other conservative investors, British American Tobacco's yield and history of dividend growth look reasonably comparable to what you'd expect from a tobacco stock. Given the rising threat level overseas for tobacco companies and a fairly high valuation, however, now may not be the best time for retirement investors to add British American Tobacco to their 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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