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, then examine whether Hershey (NYS: HSY) 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 Hershey.
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.
Hershey posts a pretty sweet score of six points. Its strong dividend and stable stock prices are attractive to conservative investors, but it needs to get itself back onto the global stage in order to cement its place in the world's candy hierarchy.
Companies across the food industry have had to deal with the effect of higher input costs. Like H.J. Heinz (NYS: HNZ) and PepsiCo's (NYS: PEP) Frito-Lay unit, both of which cut package sizes to try to pass on some higher costs to customers, Hershey came out with a new Reese's product with a third less content at a slightly higher price. The chocolate maker also joined Starbucks (NAS: SBUX) and McDonald's (NYS: MCD) in raising retail prices, given that the cost of sugar and dairy products has risen sharply.
With all those headwinds, you might think Hershey would be struggling. But recently, Hershey posted strong quarterly results, with 7.5% higher revenue and profits that almost tripled year-ago levels. Still, unlike Kraft (NYS: KFT) , whose purchase of Cadbury gave it access to markets around the world, Hershey hasn't taken an aggressive stance toward making acquisitions to bolster its global presence.
Retirees and other conservative investors have to like defensive companies like Hershey when the market is in a tough spot. The company delivers on the dividend front, but at a somewhat pricey valuation, you may want to wait for Hershey to get a bit cheaper before nibbling on the stock.
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.
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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of Starbucks and PepsiCo.Motley Fool newsletter serviceshave recommended buying shares of H.J. Heinz, Starbucks, PepsiCo, and McDonald's, as well as creating a diagonal call position in PepsiCo. 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 adisclosure policy.
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