Is Kroger the Right Stock to Retire With?

Before you go, we thought you'd like these...
Before you go close icon

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 Kroger (NYS: KR) 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 Kroger.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$12.9 billion

Pass

Consistency

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

0.39

Pass

 

Worst loss in past five years no greater than 20%

(21%)

Fail

Valuation

Normalized P/E < 18

11.83

Pass

Dividends

Current yield > 2%

1.9%

Fail

 

5-year dividend growth > 10%

10.1%

Pass

 

Streak of dividend increases >= 10 years

4 years

Fail

 

Payout ratio < 75%

21.6%

Pass

    
 

Total score

 

6 out of 10

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

With a score of six, Kroger feeds conservative investors much of what they like to see in a stock. The grocery retailer may seem like an old-fashioned concept in a quickly innovating industry, but it's still outperforming many of its competitors.

Kroger has done an excellent job thus far of facing down some negative factors in the grocery business, especially higher wholesale food costs. Unlike Safeway (NYS: SWY) and SUPERVALU (NYS: SVU) , which have seen flat to falling sales in recent quarters, Kroger posted a huge 4.6% increase in same-store comps back in June. Even more astonishingly, the company has been reducing operating costs, letting it cut retail prices at the same time that rivals like Winn-Dixie (NAS: WINN) are looking for ways to increase their prices.

That doesn't mean that Kroger's on easy street, though. Whole Foods (NAS: WFM) has changed the landscape for grocers, forcing Kroger to follow suit with organic offerings of its own. In addition, small regional players like Ruddick (NYS: RDK) have also seen success lately, perhaps representing the next big challenge for Kroger. Moreover, in its most recent report from last week, the company saw strong growth but fell short of expectations, pushing shares lower.

Kroger falls short of the 2% yield that many retirees and other conservative investors are counting on for the income they need. But with solid dividend growth, Kroger could make those who buy it for their retirement portfolios quite satisfied in the years ahead.

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 Kroger 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

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

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners