Is Apple 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.

It's hard to think of a company that has made a larger impact on the world of technology than Apple (NAS: AAPL) over the past decade. With the revolutionary iPod taking portable music to a higher level, the Cupertino giant tapped into a huge market, and its iPhone has become a huge force in the mobile world. Yet for all that Apple has done to help put many early shareholders into a position where they could retire, the question remains: Is it a good stock for conservative investors to buy today? Let's 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 Apple.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$349.6 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years5 yearsPass
 Free cash flow growth > 0% in at least four of past five years5 yearsPass
Stock stabilityBeta < 0.91.22Fail
 Worst loss in past five years no greater than 20%(56.9%)Fail
ValuationNormalized P/E < 1816.53Pass
DividendsCurrent yield > 2%0%Fail
 5-year dividend growth > 10%0%Fail
 Streak of dividend increases >= 10 yearsNMNM
 Payout ratio < 75%NMNM
    
 Total score 4 out of 8

Source: S&P Capital IQ. NM = not meaningful; Apple pays no dividend. Total score = number of passes.

With 4 points, Apple reveals a huge shortcoming that conservative investors will definitely pick up on: its lack of a dividend. Some would disagree with the huge impact that has on our 10-point scale, but with other tech giants finally getting on the dividend bandwagon, Apple could remedy the situation quite easily with its huge cash hoard.

Apple stands out as one of the top growth stocks of the past 10 years. The company managed to sustain sales and free cash flow growth even during the recession, thanks to its string of innovations. Routinely, dozens of suppliers, including camera-sensor makerOmniVision Technologies (NAS: OVTI) and power-amplifier chip producer TriQuint Semiconductor (NAS: TQNT) , rise or fall with the health of Apple's business.

More than anything else, the iPhone is behind this explosion in profitability. Because of subsidies from carriers AT&T (NYS: T) , Verizon, and now Sprint Nextel (NYS: S) , customers pay much less than the roughly $600 that Apple gets for every iPhone sale. The newer iPad has obviously provided a big boost as well.

But for the first time in years, Apple missed earnings estimates in the third quarter. Many blamed short-term delays that arguably shouldn't repeat, but others point to Amazon.com's (NAS: AMZN) Kindle Fire and other competitors as threats not just to iPad hardware sales but also to the media-distribution business on which Apple's iTunes long had an almost monopolistic stranglehold.

The one criticism that at least a few Apple investors have had is that the company has built a huge bundle of cash that sits on its balance sheet. Even longtime holdouts Cisco (NAS: CSCO) and Oracle finally caved in and started paying dividends in recent years, but Apple has continued to resist. Some believe that new CEO Tim Cook may finally start the dividend that former CEO Steve Jobs never did. If that happens, then Apple's score here could skyrocket overnight.

Without the dividend, retirees and conservative investors have to weigh the company's undeniable growth prospects and extremely attractive valuation with its share-price volatility. If you don't depend on income from your retirement portfolio, then Apple could be a good buy despite its relatively poor score on this scale.

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 Apple 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 contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of TriQuint Semiconductor, Oracle, Cisco, and Apple, as well as a bull call spread position on Cisco.Motley Fool newsletter serviceshave recommended buying shares of Apple, Cisco, and Amazon.com, as well as creating a bull call spread position on Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.

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

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