Is Monsanto the Right Stock to Retire With?

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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. Let's figure out what makes a great retirement-oriented stock, then examine whether Monsanto (NYS: MON) has what we're looking for.

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 Monsanto.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$39.3 billionPass
ConsistencyRevenue growth > 0% in at least four of past five years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.90.82Pass
 Worst loss in past five years no greater than 20%(36.5%)Fail
ValuationNormalized P/E < 1827.13Fail
DividendsCurrent yield > 2%1.5%Fail
 5-year dividend growth > 10%23.8%Pass
 Streak of dividend increases >= 10 years8 yearsFail
 Payout ratio < 75%38.1%Pass
    
 Total score 5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With just five points, Monsanto isn't growing itself into a stock that conservative investors can feel entirely comfortable with. But with its business tapped into a trend that should continue for decades, the company is worth a closer look as a long-term investment.

Monsanto makes a number of agricultural products, ranging from seeds to pesticides. As farmers have benefited from a strong price environment for their crops, it gives them more money to spend on products like Monsanto's.

That's a big turnaround from the past couple of years, when Monsanto had to deal with generic competition for its main product, Roundup. Moreover, weakness in crop prices not only hurt Monsanto but also fertilizer companies like Mosaic (NYS: MOS) , and PotashCorp (NYS: POT) , which rely on a healthy farming community to keep up demand.

But Monsanto has survived its Roundup crisis, largely by simply giving up on trying to compete with generic producers on price. With its seeds division seeing gross profit up 44%, Monsanto is giving competitors DuPont (NYS: DD) , Dow Chemical (NYS: DOW) , and Syngenta (NYS: SYT) a run for their money.

Monsanto's future lies in its seed business, and at least for now, times look good for the seedmaker. Retirees and other conservative investors may find the shares pricey and the dividend yield somewhat low, but for growth potential, Monsanto is a reasonable addition 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.

Add Monsanto to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the13 Steps to Investing Foolishly.

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. You can follow him on Twitterhere.Motley Fool newsletter serviceshave recommended buying shares of Syngenta and creating a synthetic long position on Monsanto. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.

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