Is Fastenal 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.

Many economists point to consumers as the primary drivers of the economy. But business-to-business commerce makes a bigger difference than many give credit for. Fastenal (NAS: FAST) , which sells industrial and construction supplies at both the wholesale and retail level, needs healthy business activity among its customers in order to thrive. Are Fastenal's recent results pointing to a stronger recovery? Below, we'll look at how the company 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 Fastenal.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$12.0 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.90.96Fail
 Worst loss in past five years no greater than 20%(12.1%)Pass
ValuationNormalized P/E < 1835.45Fail
DividendsCurrent yield > 2%1.4%Fail
 5-year dividend growth > 10%20.6%Pass
 Streak of dividend increases >= 10 years12 yearsPass
 Payout ratio < 75%44.8%Pass
    
 Total score 6 out of 10

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

With six points, Fastenal gives conservative investors a good chunk of what they want in the stocks they own. The company's dividend yield isn't terribly high and its valuation is pretty pricey, but share-price stability and steady dividend growth make the stock worth considering further.

You wouldn't expect Fastenal to thrive in an environment of economic uncertainty. With concerns about manufacturing and construction continuing to persist, a company with heavy exposure to those industries would appear to be in danger of bad results.

But nothing could be further from the truth in Fastenal's case. The company has aggressively expanded, with plans to add 115-125 stores this year. Moreover, partnerships with Kimberly-Clark (NYS: KMB) , 3M (NYS: MMM) , and Eaton (NYS: ETN) have given Fastenal an edge in getting its products off the shelves.

The main problem, though, is that Fastenal's strong results are already priced into the stock. With competitors W.W. Grainger (NYS: GWW) and MSC Industrial Direct (NYS: MSM) selling at much more modest earnings multiples, it's tough to recommend Fastenal, especially given that its future growth rate isn't expected to be much higher than its peers'.

For retirees and conservative investors, Fastenal's potential is clearly there. But at today's prices, you'd be better off putting this one on your watchlist and waiting for a better opportunity to invest.

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 Fastenal 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 Kimberly-Clark, 3M, and MSC Industrial Direct, as well as creating a diagonal call position in 3M.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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