Is Honeywell 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.

Over the next week, Congress will try to haggle out major spending cuts in an attempt to bring the national budget closer to balance. For months, investors have feared that companies that serve the defense industry would be natural targets for such cuts. Those concerns apply strongly to Honeywell (NYS: HON) , whose diverse set of businesses includes substantial exposure to the military. Will Honeywell survive the budget ax? 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 Honeywell.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$41.2 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 years4 yearsPass
Stock stabilityBeta < 0.91.39Fail
 Worst loss in past five years no greater than 20%(45.3%)Fail
ValuationNormalized P/E < 1819.93Fail
DividendsCurrent yield > 2%2.8%Pass
 5-year dividend growth > 10%7.9%Fail
 Streak of dividend increases >= 10 years1 yearFail
 Payout ratio < 75%37.7%Pass
    
 Total score 5 out of 10

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

With just five points, Honeywell only gives conservative investors about half of the desirable traits they like to see in a stock. With a big drop in free cash flow over the past year canceling out four years of steady growth, along with a dividend yield that's actually much lower than some other defense plays, Honeywell has some work to do.

Honeywell has a variety of businesses, ranging from making aircraft engines and power systems to specialty chemicals. More than 40% of its sales come from its automation and control solutions segment, which has more general commercial application. In fact, it's that segment, along with its specialty materials business, that has seen the most sales growth over the past five years, while aerospace and transportation have been flat to down. That may be what's behind the company's move to sell its consumer products business to New Zealand's Rank Group for roughly $950 million.

Some of Honeywell's recent strategic moves have emphasized the growth side of its business. Earlier this year, the company bought wireless communications product maker EMS Technologies in a $491 million transaction, beating out Comtech Telecommunications (NAS: CMTL) .

Nevertheless, for now, investors tend to focus on the defense segment. Compared to peers Boeing (NYS: BA) , General Dynamics (NYS: GD) , and L-3 Communications (NYS: LLL) , analyst expectations for Honeywell were fairly ambitious -- yet the company delivered on them with a big beat on the bottom line, eclipsing estimates by a dime. Given Honeywell's presence in innovative technology like unmanned aerial vehicles, budget tightening could actually help the company compared to some of its less progressive competitors.

For retirees and other conservative investors, Honeywell's current dividend is attractive and has grown substantially in recent years despite tough economic times. With its efforts to diversify its business exposure, Honeywell may not meet every expectation as a retirement stock, but it certainly appears to be moving in that direction.

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 Honeywell 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 Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of L-3 Communications and General Dynamics. Motley Fool newsletter services have recommended buying shares of L-3 Communications. 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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