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 Kimberly-Clark (KMB 2.38%) makes a great retirement-oriented stock.
Consumer-products companies have always made solid choices for retirement portfolios, and Kimberly-Clark has stood out from its competition lately because of its consistent growth and smart decisions, even in a fairly tough environment of high raw-materials costs. But with shares getting pricey, is Kimberly-Clark still a good pick for a retirement portfolio? Below, we'll revisit how Kimberly-Clark 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 Kimberly-Clark.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$36.6 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 |
3 years |
Fail | |
|
Stock stability |
Beta < 0.9 |
0.31 |
Pass |
|
Worst loss in past five years no greater than 20% |
(21.0%) |
Fail | |
|
Valuation |
Normalized P/E < 18 |
20.49 |
Fail |
|
Dividends |
Current yield > 2% |
3.4% |
Pass |
|
5-year dividend growth > 10% |
6.9% |
Fail | |
|
Streak of dividend increases >= 10 years |
41 years |
Pass | |
|
Payout ratio < 75% |
65.8% |
Pass | |
|
Total score |
6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Kimberly-Clark last year, the company has lost a point, as its earnings multiple perked up considerably. Shareholders aren't complaining about that, though, as the stock has risen 30% over the past year.
Conservative investors have long gravitated to consumer stocks because of their defensive characteristics and strong brand-loyalty. With the popular Kleenex brand, as well as its Scott line of paper towels and bathroom tissue, Kimberly-Clark has been more than able to hold its own, even against larger competitors.
But times have been increasingly tough for Kimberly-Clark and its peers. High costs for raw materials to make paper products and other necessities have put pressure on margins throughout the industry, and many companies have had to take steps to cut costs. Colgate-Palmolive (CL 1.38%), for instance, said late last year that it would reduce its global workforce by about 6% in order to keep its wide margins intact.
The big question facing Kimberly-Clark is whether Procter & Gamble (PG +0.16%) will recover from its recent malaise. P&G has come under criticism for some product-launch failures that have brought its revenue growth to a standstill, opening the door for Colgate and Kimberly-Clark to grab up more market share. In particular, emerging markets represent a huge potential gold mine for Kimberly-Clark, as rising middle class populations around the world are potential new customers for the company.
For retirees and other conservative investors, a 40-plus-year streak of rising dividends and a healthy yield between 3% and 4%, are definitely valuable attributes for Kimberly-Clark shareholders. But paying up for the stock right now makes Kimberly-Clark a less conservative investment than it would usually be. Waiting for a pullback seems like the more prudent move for cautious investors at this point.
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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