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, today I'm looking at 10 measures to show whether Intel (INTC 5.00%) makes a great retirement-oriented stock.
As a member of the Dow Jones Industrials (^DJI 0.96%) for more than a decade, Intel's history as a leader and innovator in the semiconductor space is indisputable. But as the technology industry shifts from PCs to mobile devices, Intel has struggled to keep up. Can the chip giant adapt and conquer the mobile market like it did the PC market decades ago? Below, we'll revisit how Intel 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 Intel.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$105 billion |
Pass |
|
Consistency |
Revenue growth > 0% in at least four of five past years |
2 years |
Fail |
|
Free cash flow growth > 0% in at least four of past five years |
2 years |
Fail | |
|
Stock stability |
Beta < 0.9 |
1.02 |
Fail |
|
Worst loss in past five years no greater than 20% |
(43.5%) |
Fail | |
|
Valuation |
Normalized P/E < 18 |
11.84 |
Pass |
|
Dividends |
Current yield > 2% |
4.3% |
Pass |
|
Five-year dividend growth > 10% |
14.1% |
Pass | |
|
Streak of dividend increases >= 10 years |
9 years |
Fail | |
|
Payout ratio < 75% |
39.5% |
Pass | |
|
Total score |
5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Intel last year, the company has kept its five-point score for the third year in a row. But the stock has suffered badly, falling 25% over the past year as many investors question its ability to remain an industry leader in the future.
Intel has done a bad job of managing investor expectations lately. In both of its two most recent quarterly earnings reports, the chip maker has failed to give strong enough guidance to inspire investors about its future. After hitting high-water marks for sales and net income in late 2011, Intel has suffered declines on those measures, as well as free cash flow.
The big issue for Intel is the extent to which competitors have swooped into the mobile space. ARM Holdings (ARMH +0.00%) was never able to break far into the PC market, but its low-power-consumption chip architecture is ideally designed for battery-driven mobile devices. Intel has worked to catch up, but so far progress has been slow. Meanwhile, Qualcomm (QCOM 0.97%) has used its wealth of smartphone technology patents to become the dominant supplier of chips for smartphones, reaching out to both major smartphone platforms to drive sales across the industry.
Intel does have a couple of competitive advantages, though. Intel's brand is much better-known among consumers than those of its rivals, so if the company does manage to get a strong mobile offering onto the market, it will have the marketing muscle to make people aware of it. Also, Intel's moves to capitalize on data center demand have given it its best source of growth recently, and it should be able to continue moving in the right direction in that market.
For retirees and other conservative investors, the drop in Intel shares has boosted its dividend yield and made its shares even more attractively valued. The big question, though, is whether it can go beyond the slowly deteriorating PC business to find new opportunities. Only those who feel comfortable about those prospects should put Intel into their retirement 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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