Is Safeway 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 Safeway (NYS: SWY) 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 Safeway.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$6.33 billionFail
ConsistencyRevenue growth > 0% in at least four of five past years3 yearsFail
 Free cash flow growth > 0% in at least four of past five years4 yearsPass
Stock stabilityBeta < 0.90.71Pass
 Worst loss in past five years no greater than 20%(29.7%)Fail
ValuationNormalized P/E < 1810.98Pass
DividendsCurrent yield > 2%3.2%Pass
 5-year dividend growth > 10%19.5%Pass
 Streak of dividend increases >= 10 years7 yearsFail
 Payout ratio < 75%34.1%Pass
    
 Total score 6 out of 10

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

With six points, Safeway has a lot of what conservative investors like in a stock. But the grocer is in a harshly competitive business, and it has had a hard time keeping up in a tough environment.

Grocery retailers are feeling pressure from both sides of their business. On the supply side, food prices are on the rise, and that has forced grocers like Safeway and Kroger (NYS: KR) to make hard decisions about whether to pass on their costs by raising their prices to customers, or to eat the added costs and see profit margins narrow as a result. But on the demand side, with high gas prices, shoppers have less disposable income to spend at the grocery store. And of course, the specter of competition from big-box retailers Wal-Mart (NYS: WMT) and Costco (NAS: COST) constantly looms large over Safeway and its specialized peers.

Last month, Safeway saw its shares drop precipitously after reporting just a 0.5% increase in same-store sales for the quarter, along with falling margins. That may have been better than SUPERVALU's (NYS: SVU) 3.9% decline in comps, but it fell well short of premium grocer Whole Foods (NAS: WFM) and its 8.4% comp surge.

What retirees and other conservative investors should note, though, is that not only does Safeway offer a high and growing yield -- greater than Kroger and Whole Foods -- it also has produced a great deal of free cash flow growth in recent years, despite a hiccup in the last year. The grocery business may not be the safest in the market, but if you want exposure to the industry, Safeway is worth a closer look.

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 Safeway 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. The Motley Fool owns shares of Whole Foods, SUPERVALU, Wal-Mart, and Costco.Motley Fool newsletter serviceshave recommended buying shares of Whole Foods, Wal-Mart, and Costco; buying calls in SUPERVALU; and creating a diagonal call position in Wal-Mart. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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