Is Alcoa 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 Alcoa (NYS: AA) 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 Alcoa.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$10.8 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years2 yearsFail
 Free cash flow growth > 0% in at least four of past five years2 yearsFail
Stock stabilityBeta < 0.92.09Fail
 Worst loss in past five years no greater than 20%(68.3%)Fail
ValuationNormalized P/E < 1812.03Pass
DividendsCurrent yield > 2%1.2%Fail
 5-year dividend growth > 10%(27.5%)Fail
 Streak of dividend increases >= 10 years0 yearsFail
 Payout ratio < 75%13.4%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, Alcoa doesn't have the track record that conservative investors prefer to see. With huge share price volatility, sporadic growth, and a big dividend cut in recent years, the company's low valuation seems quite justified.

Alcoa has a special place in providing an overall read on the economy. Not only does the aluminum giant tend to follow the ups and downs of the business cycle, but it also reports very early every earnings season. As a result, investors see the company as a bellwether for the entire stock market's health.

Right now, that connection to the overall economy is hurting Alcoa. Late last month, fellow Fool Morgan Housel noted that Alcoa and General Motors (NYS: GM) could be among the hardest hit if the economic recovery has in fact ended. On the other hand, with the stock price so low, anything short of a double-dip recession could lead to gains.

Still, as poor as Alcoa's numbers look, they may be inflated. Revelations of Goldman Sachs (NYS: GS) and its practice of warehousing aluminum ingots may have boosted profits of not only major producers like Alcoa and Rio Tinto (NYS: RIO) but also smaller producers Century Aluminum (NAS: CENX) and Kaiser Aluminum (NAS: KALU) .

Despite Alcoa's presence in the Dow Jones Industrials (INDEX: ^DJI) and its good overall reputation, retirees and other conservative investors can't be happy with all the uncertainty associated with the stock. Until the dust clears, you'd be better off looking for more stable stocks for 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 Alcoa 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 contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of General Motors. 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 a disclosure policy.

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

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