Is J.M. Smucker the Right Stock to Retire With?
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 J.M. Smucker (NYS: SJM) 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 J.M. Smucker.
What We Want to See
Pass or Fail?
Market cap > $10 billion
Revenue growth > 0% in at least four of past five 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%
7 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of 7, J.M. Smucker's stock is just as yummy for conservative investors as its jam is for customers. The food stalwart hasn't had perfect sailing lately, but it's avoided many of the pitfalls that have hammered other stocks in recent years.
Smucker is well known for its consumer brands, including its signature jams and jellies, as well as Folgers coffee. As the distributor of Dunkin' Brands (NAS: DNKN) packaged coffee in stores, Smucker has also benefited from the donut-maker's recent IPO.
Like fellow food companies Starbucks (NAS: SBUX) and Green Mountain Coffee Roasters (NAS: GMCR) , though, Smucker has felt the heat from volatile commodity prices. For instance, after dealing with a coffee price increase, coffee sales by volume fell 8% in its latest quarter versus year-ago levels. Yet when coffee futures fell more recently, it cut prices 6%, beating Kraft (NYS: KFT) to the punch.
Going forward, the big question for Smucker is whether raw ingredient costs will cooperate to help the company maintain and expand margins. Although sales have risen, stagnant free cash flow is troublesome both for the long-term prospects of the company and its future dividend growth. For now, though, retirees and other conservative investors have a lot to gain from holding 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.
Add J.M. Smucker 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 the13 Steps to Investing Foolishly.
At the time this article was published
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.