Is Mattel 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 Mattel (NAS: MAT) 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 Mattel.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$8.5 billionFail
ConsistencyRevenue growth > 0% in at least four of five past years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.90.96Fail
 Worst loss in past five years no greater than 20%(12.9%)Pass
ValuationNormalized P/E < 18 16.36Pass
DividendsCurrent yield > 2%3.7%Pass
 5-year dividend growth > 10%20.9%Pass
 Streak of dividend increases >= 10 years2 yearsFail
 Payout ratio < 75%63.9%Pass
    
 Total score 6 out of 10

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

With six points, Mattel has a lot of what conservative investors like to see in a stock. Although the toymaker hasn't seen much free cash flow growth lately, the company has still managed to push its dividend up sharply in recent years.

The toy industry is a tough one for investors. With offerings including Barbie and American Girl, Mattel dukes it out with Hasbro (NAS: HAS) as the two legacy U.S. toy companies. However, upstarts like Pokemon-making JAKKS Pacific (NAS: JAKK) and the education-oriented LeapFrog Enterprises (NYS: LF) have forced Mattel to update its lines to appeal to new generations of buyers.

Where toymakers have found success is through licensing deals with movie studios. With Viacom (NYS: VIA) and its Paramount filmmaking division recently joining Disney's (NYS: DIS) Pixar and DreamWorks Animation (NYS: DWA) in making its own animated films, Mattel will have a new source of potentially licensable characters to profit from.

Unfortunately, in its quest for growth, Mattel has made some missteps. After two years, the company closed its 36,000-square-foot flagship Barbie store in Shanghai. Yet emerging markets will remain a big part of the company's growth potential going forward.

Even with its stagnant cash-flow growth, Mattel does a better job than its peers in showing investors the money. For retirees and other conservative investors with a big of nostalgia for their long-lost toy collections, Mattel could be a good way to restore some of their former glory and get some investment income in the process.

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 Mattel 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.Motley Fool newsletter serviceshave recommended buying shares of Hasbro, Disney, and DreamWorks Animation. 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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