Is Southwest Airlines 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 Southwest Airlines (NYS: LUV) 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 Southwest Airlines.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$6.5 billion

Fail

Consistency

Revenue growth > 0% in at least four of five past years

5 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

1.12

Fail

 

Worst loss in past five years no greater than 20%

(29.2%)

Fail

Valuation

Normalized P/E < 18

10.49

Pass

Dividends

Current yield > 2%

0.2%

Fail

 

5-year dividend growth > 10%

0%

Fail

 

Streak of dividend increases >= 10 years

0 years

Fail

 

Payout ratio < 75%

2.6%

Pass

 

 

 

 

 

Total score

 

3 out of 10

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

With only three points, Southwest Airlines isn't flying very high. Conservative investors may see value in the shares, but they aren't getting the dividend payouts or stable growth that they expect from a stock.

It's no surprise that Southwest is the most-watched airline. Southwest has won plenty of accolades for its combination of good business practices and customer service, and it has remained consistently profitable even as rivals Delta Air Lines (NYS: DAL) , United Continental (NYS: UAL) , and US Airways (NYS: LCC) have all gone through bankruptcies in recent years.

Yet lately, the company has faced the same struggles as its peers. High fuel costs have forced Southwest to raise fares about 40% over the past five years. Moreover, some seem to think that the company is considering moving away from the success-building strategies of the past that have helped it stay competitive against up-and-comers like JetBlue (NAS: JBLU) . For instance, rumors surfaced that Southwest was considering moving away from its all-Boeing (NYS: BA) fleet in favor of buying airplanes from Airbus -- a rumor that CEO Gary Kelly denied.

Retirees and other conservative investors don't like low-dividend stocks that can't hold their value, and unfortunately, Southwest fails both criteria. Southwest may be the best in its business, but that doesn't earn it an automatic place in your 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 Southwest Airlines 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 the "13 Steps to Investing Foolishly."

At the time this article was published

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