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. Let's figure out what makes a great retirement-oriented stock and then examine whether Waste Management (NYS: WM) has what we're looking for.
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 Waste Management.
What We Want to See
Pass or Fail?
Market cap > $10 billion
Revenue growth > 0% in at least four of five past years
Free cash flow growth > 0% in at least four of past five years
Beta < 0.9
Worst loss in past five years no greater than 20%
Normalized P/E < 18
Current yield > 2%
5-year dividend growth > 10%
Streak of dividend increases >= 10 years
Payout ratio < 75%
6 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With its score of 6, Waste Management gives conservative investors a good portion of what they like to see in promising stocks. The trash and recycling giant will never have any shortage of business in this growing world, and the company hasn't yet tapped into a world of possibilities.
Waste Management leads the nation in waste collection and recycling, beating out Republic Services (NYS: RSG) and dwarfing smaller competitors like Waste Connections (NYS: WCN) and specialty medical-waste handler Stericycle (NAS: SRCL) . The trash business may sound like a dirty place to try to make money, but Waste Management has actually turned it into a goldmine, collecting millions of tons of recyclables and reselling them to earn additional profit. Moreover, with ideas like using landfill-generated natural gas for its trucks and creating essentially disposable trash bins for consumers, the company continues to innovate.
Perhaps Waste Management's biggest untapped opportunity, though, comes from overseas. For instance, India has a huge problem from unchecked garbage dumping that leaves room for an established global player to build a presence. International competition from Veolia Environnement (NYS: VE) and Danaher (NYS: DHR) certainly doesn't give Waste Management free rein around the world, but breaking the company's reluctance to go abroad could do wonders for the stock.
Retirees and other conservative investors have to be happy with a nice dividend yield and attractive valuation. Although Waste Management's numbers show a disturbing lack of revenue and free cash flow growth, it's hard to argue that the company isn't in a growing industry. Waste Management may be trashy, but it'd make a pretty addition to many retirement portfolios.
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 Waste Management 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 whether you're on track by following the13 Steps to Investing Foolishly.
At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of Veolia Environnement and Waste Management.Motley Fool newsletter serviceshave recommended buying shares of Waste Management, Republic Services, and Stericycle, as well as creating a covered strangle position in Waste Management. 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.