Will Raytheon 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. As part of an ongoing series, I'm looking today at 10 measures to show whether Raytheon (RTN +0.00%) makes a great retirement-oriented stock.

Raytheon has had great success as a member of the defense industry, providing much-needed weapons systems and sophisticated technology to the military. But with ongoing budget cuts, will the defense contractor feel the pinch? Below, we'll revisit how Raytheon 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 Raytheon.

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

Since we looked at Raytheon last year, the company has lost a point, as revenue dropped for the second year in a row. Yet the stock has held up fairly well, rising 10% over the past year.

Raytheon has done a very good job of navigating the changing face of the defense industry. With its emphasis on missile and defense systems as well as space-based applications, Raytheon has focused on the must-have cutting-edge technology that's least likely to get cut. By contrast, rival Lockheed Martin (LMT 0.36%) has had to deal with controversy over its high-cost F-35 fighter program, making it a much bigger target for cuts than Raytheon's programs.

Thanks to that strategy, Raytheon has kept winning a lot of defense projects even as sequestration takes effect. With a mysterious DARPA contract and a modification boosting its relationship with the U.S. Missile Defense Agency in just the past week, Raytheon seems to be moving forward despite overall spending cuts. The company has also kept itself in the loop with prospective partners, as SAIC (NYSE: SAI) called on Raytheon to help build a sonar system for anti-submarine detection.

Still, Raytheon has had to take steps to stay relevant. Both it and rivals Northrop Grumman (NOC 1.54%) and General Dynamics have made acquisitions to boost their presence in the cybersecurity industry, identifying it as a defense necessity. Yet valuations remain at extremely low levels, with Northrop in particular sporting an earnings multiple well below 10 as investors worry that overall spending cuts will lead to accelerations of recent revenue declines.

For retirees and other conservative investors, the fact that Raytheon has been able to keep its dividend up and still trades at an attractive valuation are definitely points in its favor. Declining earnings could prove troublesome, but anything short of a cataclysmic collapse in the defense industry should leave Raytheon looking good as a long-term investment.

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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