Is Johnson Controls 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.

Most of us take our cars and trucks for granted. But inside every vehicle, there's a huge wealth of knowledge and innovation. Johnson Controls (NYS: JCI) is one of the companies that makes the auto experience what it is, with seating systems, instrument panels, and batteries for hybrid vehicles. But with the auto industry constantly walking on thin ice, how's Johnson Controls coping? 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 Johnson Controls.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$19.3 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 < 0.91.89Fail
 Worst loss in past five years no greater than 20%(48.6%)Fail
ValuationNormalized P/E < 1814.85Pass
DividendsCurrent yield > 2%2.5%Pass
 5-year dividend growth > 10%11.6%Pass
 Streak of dividend increases >= 10 years2 yearsFail
 Payout ratio < 75%25.4%Pass
    
 Total score 6 out of 10

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

With six points, Johnson Controls has some attractive characteristics for conservative investors, but it falls short on some other categories. The big question the company faces is one that we're all struggling with: whether the economy will keep improving slowly or turn back into recession.

Johnson Controls ranks among top suppliers to the auto industry, joining Delphi (NYS: DLPH) and Magna International (NYS: MGA) as so-called "Tier 1" providers. That sounds like a good deal, but it doesn't automatically bring success. Delphi, for instance, counts General Motors (NYS: GM) as a major customer -- although no longer its only one -- but its recent IPO hasn't taken off.

As a result, Johnson Controls has branched out. It's making a big push into electric-car batteries, where much smaller companies including A123 Systems (NAS: AONE) and Valence Technology (NAS: VLNC) have seen a lot of volatility as the fortunes of lithium-ion battery technology rise and fall. It also plays a supporting role in green energy-use practices, including joining businesses such as EnerNOC (NAS: ENOC) in helping companies use demand-response to manage power consumption.

For retirees and other conservative investors, though, the biggest benefits are that the company has a good dividend yield that's grown significantly in recent years. At the same time, its valuation is quite reasonable. The stock certainly carries risks, but Johnson Controls looks like a reasonable play on both traditional vehicle industry and alternative energy going forward.

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 Johnson Controls 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 EnerNOC. Motley Fool newsletter services have recommended buying shares of EnerNOC and General Motors, as well as writing puts in EnerNOC. 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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