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 Whole Foods Market (NAS: WFM) 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 Whole Foods Market.
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%
3 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With only three points, Whole Foods Market isn't delivering what conservative investors like to get from a stock. Despite strong growth, the company had to suspend its dividend in 2008 and only recently restored it to a fraction of its pre-crisis level.
Whole Foods has been a maverick in the grocery business, successfully translating natural and organic foods into a supermarket concept. In doing so, the company hasn't just made money; it's transformed the industry, leading competitors like Wal-Mart (NYS: WMT) and Kroger (NYS: KR) to boost their own organic offerings.
Whole Foods continues to demonstrate its strength in the industry. While conventional groceries like SUPERVALU (NYS: SVU) and Safeway (NYS: SWY) have struggled just to try to sustain current sales levels, Whole Foods has consistently posted strong growth in both revenue and profits. In July, the company beat analyst estimates and offered positive guidance for the rest of the year as well.
To make retirees and other conservative investors happy, what Whole Foods needs to do now is restart its commitment to a higher dividend payout. After having cut off dividends for more than two years, the company only restored its payout to early 2005 levels. Once it gets its payout back on the growth path, Whole Foods will stand a better chance of making it into 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.
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At the time thisarticle was published
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