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.
Conservative investors routinely turn to consumer-products stocks as defensive plays on the economy, and Colgate-Palmolive (CL 2.05%) is one of the strongest such companies out there. Yet unusually, the stock has actually gotten huge amounts of investor attention lately, raising the question of whether its high-quality business justifies its current valuation. Let's revisit how Colgate-Palmolive 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 Colgate-Palmolive.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$52.4 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 |
2 years |
Fail | |
|
Stock stability |
Beta < 0.9 |
0.44 |
Pass |
|
Worst loss in past five years no greater than 20% |
(10.1%) |
Pass | |
|
Valuation |
Normalized P/E < 18 |
23.08 |
Fail |
|
Dividends |
Current yield > 2% |
2.4% |
Pass |
|
5-year dividend growth > 10% |
11.8% |
Pass | |
|
Streak of dividend increases >= 10 years |
49 years |
Pass | |
|
Payout ratio < 75% |
47.2% |
Pass | |
|
Total score |
8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Colgate-Palmolive last year, the company has been unable to gain back the point it lost from 2011 to 2012. In fact, the stock's valuation has climbed even higher, with the shares having risen nearly 20% over the past year.
Colgate has become one of the best companies in America by sticking to its devotion to innovation. Even though it's only a fraction the size of its larger rivals, Colgate has held its own in markets throughout the world with its product lineup.
In particular, Colgate has done a good job of catching up with Procter & Gamble (PG 1.04%), which has left the door open for Colgate to expand broadly in emerging markets. In particular, Latin America has become an increasingly important market for Colgate, and growth there has helped drive impressive results for the company. At the same time, making sure that margins stay wide has given Colgate a competitive advantage over Kimberly-Clark (KMB 0.69%) and Unilever (UL 0.20%) in dealing with the raw-materials cost increases that companies throughout the consumer-products industry have had to deal with lately.
In its most recent quarter, Colgate continued to show favorable performance compared with Procter & Gamble and its other peers. Although growth in the Latin American segment slowed somewhat, the company still did well in the key markets of Brazil and Mexico. Weakness in Venezuela, which subsequently devalued its currency and gave Colgate another hit, was responsible for a big part of the company's failing to hit analysts' revenue estimates.
For retirees and conservative investors, nearly half a century of healthy dividend increases is certainly a compelling reason to own Colgate-Palmolive. But even with the growth potential that emerging markets provide the company, it's hard to justify paying such a high earnings multiple for Colgate-Palmolive. If investors grow weary of defensive plays and sell off the stock, then it would make a smarter buy for a 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.
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