Is Nucor 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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

One stock that has stood out in the steel industry for its innovative production process is Nucor (NYS: NUE) . But with a possible global slowdown coming, now may seem like a bad time to invest in companies tied to the economic cycle. Below, we'll take a look at how Nucor does on our 10-point scale.

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 Nucor.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$11.3 billion

Pass

Consistency

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

3 years

Fail

 

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

2 years

Fail

Stock stability

Beta < 0.9

1.08

Fail

 

Worst loss in past five years no greater than 20%

(19.4%)

Pass

Valuation

Normalized P/E < 18

22.23

Fail

Dividends

Current yield > 2%

4.2%

Pass

 

5-year dividend growth > 10%

32.8%

Pass

 

Streak of dividend increases >= 10 years

38 years

Pass

 

Payout ratio < 75%

97.4%

Fail

    
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With five points, Nucor has some traits that appeal to conservative investors. But despite a long history of delivering great dividends to shareholders, the steel company has found growth hard to come by recently, and a combination of expensive valuations and a high payout ratio are troubling.

Nucor produces steel, but it does so in a way that's different from other large producers. Rather than starting solely from raw materials like iron ore, Nucor is the largest recycler of scrap in North America. Moreover, unlike U.S. Steel (NYS: X) and its integrated steel mill model, Nucor uses smaller "minimills" rather than huge production facilities, allowing Nucor to reduce transportation costs and take advantage of local resources and labor. Commercial Metals (NYS: CMC) , Steel Dynamics (NAS: STLD) , and AK Steel (NYS: AKS) also use minimills to at least some extent, but Nucor has a much larger market cap than any of them.

During the recent market downturn, steel stocks have suffered as fears of a slowdown in China have spread throughout the commodity sector. The net result is that for Nucor and rivals like ArcelorMittal (NYS: MT) , valuations now look fairly attractive.

The big question for retirees is whether the company's dividends have gotten ahead of themselves. Right now, the company is paying most of its earnings in dividends. But if the company gets a much-needed profit boost from here, then that payout ratio could come down -- and Nucor could make a more attractive stock for retirement portfolios.

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 Nucor 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 Nucor. 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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