Is MasterCard 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 MasterCard (NYS: MA) 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 MasterCard.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$42.8 billion

Pass

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

1.03

Fail

 

Worst loss in past five years no greater than 20%

(33.4%)

Fail

Valuation

Normalized P/E < 18

22.42

Fail

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%

3.8%

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, MasterCard isn't giving conservative investors much of what they want in a stock. With only a token dividend and a fairly high valuation right now, the credit card giant's consistent revenue growth isn't enough to satisfy everyone.

MasterCard is well-known as the second-largest processor of global payments behind industry leader Visa (NYS: V) . Doing business in 210 countries, MasterCard has exposure not only to the mature economies of the U.S., Western Europe, and Japan but also emerging markets around the world.

The payments business is a cutthroat industry, especially right now. With smartphones opening up the prospect of mobile payments, MasterCard's legacy card business is at risk. But the company is building partnerships to defend its turf, with MasterCard joining Sprint Nextel (NYS: S) and Citigroup (NYS: C) to work on Google's (NAS: GOOG) new Google Wallet system. Shareholders shouldn't expect rivals Visa, Discover Financial (NYS: DFS) , and American Express (NYS: AXP) to go down without a fight, but MasterCard is doing a good job sustaining its growth trajectory.

Retirees and other conservative investors will be disappointed at MasterCard's minuscule 0.2% dividend yield, especially given that its earnings could support a much higher payout. Moreover, its shares carry a valuation higher than any of its three plastic-producing rivals. Income-seeking investors won't get what they want from MasterCard, but for those who can afford to focus more on growth, the shares may be worth a second look.

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 MasterCard 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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