Is ConAgra 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 ConAgra (NYS: CAG) 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 ConAgra.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$10.1 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years2 yearsFail
Stock stabilityBeta < 0.90.73Pass
 Worst loss in past five years no greater than 20%(28%)Fail
ValuationNormalized P/E < 1814.11Pass
DividendsCurrent yield > 2%3.8%Pass
 5-year dividend growth > 10%(2.3%)Fail
 Streak of dividend increases >= 10 years3 yearsFail
 Payout ratio < 75%45.8%Pass
    
 Total score 6 out of 10

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

With six points, ConAgra falls short of giving conservative investors everything they'd like to see in a stock. The food company is in a classic defensive business, but higher costs are crimping margins and making for a tough environment.

ConAgra is the company behind Healthy Choice, Orville Redenbacher's, and Chef Boyardee. Those well-known consumer brands give the company some ballast against falling stock markets when the economy goes awry.

Yet as a processed food maker, ConAgra is vulnerable to higher prices for the raw ingredients it puts in its products. Like Ralcorp (NYS: RAH) and Flowers Foods (NYS: FLO) , ConAgra has seen rising raw food costs hit its bottom line.

If you look only at earnings, ConAgra stock seems cheap but doesn't match up to even lower P/Es from peers Archer Daniels Midland (NYS: ADM) and Chinese hog producer Zhongpin (NAS: HOGS) . But on a free cash flow basis, ConAgra is healthier even than General Mills (NYS: GIS) -- let alone ADM and Zhongpin, each of which sports negative free cash flow.

After cutting its dividend a few years ago, ConAgra is back on the right track with a dividend yield approaching 4%. Although ConAgra certainly isn't a risk-free investment as its 2008 drop of 28% shows, retirees and other conservative investors may want to take a closer look to see if the food company gives them the right combination of potential reward and low risk.

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 ConAgra 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 Flowers Foods and writing puts on Zhongpin. 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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