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.
Wal-Mart (NYSE: WMT ) has been the biggest retailer in the world for a long time, earning its place among the Dow Jones Industrials (DJINDICES: ^DJI ) with its industry leadership. But being No. 1 hasn't spared Wal-Mart from big challenges. Below, we'll revisit how Wal-Mart 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 Wal-Mart.
Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
Size | Market cap > $10 billion | $236 billion | Pass |
Consistency | Revenue growth > 0% in at least four of five past years | 5 years | Pass |
| � | Free cash flow growth > 0% in at least four of past five years | 3 years | Fail |
Stock stability | Beta < 0.9 | 0.35 | Pass |
| � | Worst loss in past five years no greater than 20% | (2.6%) | Pass |
Valuation | Normalized P/E < 18 | 15.57 | Pass |
Dividends | Current yield > 2% | 2.7% | Pass |
| � | Five-year dividend growth > 10% | 12.6% | Pass |
| � | Streak of dividend increases >= 10 years | 38 years | Pass |
| � | Payout ratio < 75% | 31.5% | Pass |
| � | � | � | � |
| � | Total score | � | 9 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Wal-Mart last year, the company has dropped a point, losing its perfect score after two years of scoring 10 points. Yet the stock has done perfectly fine recently, rising about 20% over the past year.
Wal-Mart has largely recovered from the slump it experienced from 2009 to 2011, when same-store sales declined for nine straight quarters. Yet even now the retailer is still dealing with temperamental customers. Although Wal-Mart posted double-digit earnings-per-share growth in its most recent quarter, reports of weak trends in January and early February have investors concerned about the impact that low-income shoppers with less disposable income could have on the current quarter.
This time around, Wal-Mart doesn't face the same competition that it did during the aftermath of the financial crisis. Back then, deep-discounters Dollar Tree (NASDAQ: DLTR ) and Dollar General (NYSE: DG ) undercut Wal-Mart on the low side of its customer base, attracting value shoppers with even cheaper prices than the retail giant could match. Yet recently, dollar stores have seen the same pressure on their cash-strapped customers, making them look much less attractive as investments.
One important trend Wal-Mart has caught on to is getting tech-savvy. By harnessing the Internet and boosting its mobile-shopping presence, Wal-Mart hopes to hold off Amazon.com and make its customers more loyal.
For retirees and other conservative investors, the company's recent dividend increase is only the latest in a long series of hikes that have rewarded long-term shareholders immensely. Despite some sales concerns, Wal-Mart remains a safe bet for retirement portfolios in need of retail exposure.
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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