Is Lorillard 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 Lorillard (NYS: LO) 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 Lorillard.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$15.4 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years5 yearsPass
 Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.90.43Pass
 Worst loss in past five years no greater than 20%(25.2%)Fail
ValuationNormalized P/E < 1814.40Pass
DividendsCurrent yield > 2%4.7%Pass
 5-year dividend growth > 10%12.2%*Pass
 Streak of dividend increases >= 10 years3 yearsFail
 Payout ratio < 75%66.3%Pass
    
 Total score 7 out of 10

Source: Capital IQ, a division of Standard & Poor's. *Three-year dividend growth rate since 2008 IPO. Total score = number of passes.

With a score of seven, Lorillard gives conservative investors much of what they like to see in a stock. The tobacco company isn't as much a household name as some of its competitors, but when it comes to financial results, Lorillard delivers the goods.

Lorillard is the nation's third-largest tobacco company, making the No. 1 brand of menthol cigarettes, Newport. That menthol presence actually caused the company some stress recently, as some investors feared the FDA would regulate menthol cigarettes more harshly than others. When the FDA said it would leave its report unchanged, shares surged upward.

Nevertheless, many question the long-term viability of tobacco companies in the U.S. market. Although Philip Morris International (NYS: PM) and British American Tobacco (ASE: BTI) have the benefit of working primarily in international markets, giants like Altria (NYS: MO) and Reynolds American (NYS: RAI) face the same potential regulatory challenges as Lorillard. With anti-smoking sentiment at all-time highs and the need for tax revenue as great as ever, Lorillard faces assaults on two fronts.

Recently, Lorillard reported strong earnings but gave some cloudy guidance going forward. Revenue for the company's second quarter rose 12% from year-ago levels and net income saw an 11% rise. But Lorillard said that wholesaler inventories got bloated, which will make its third quarter weaker than it was in 2010.

Retirees and other conservative investors have to like the solid dividends that Lorillard delivers. Lorillard certainly isn't a risk-free stock, but for those willing to take the regulatory risk, the potential returns are definitely there.

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 Lorillard 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. The Motley Fool owns shares of Philip Morris International and Altria.Motley Fool newsletter serviceshave recommended buying shares of Philip Morris International. 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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