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.
You wouldn't think that hawking the basic elements would give anyone a real profit opportunity. But Praxair (NYS: PX) has turned hydrogen, helium, nitrogen, and oxygen into cold hard cash for decades. Now, though, is a slow economy letting the air out of Praxair's balloon? Below, we'll look at how Praxair 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 Praxair.
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: S&P Capital IQ. Total score = number of passes.
With six points, Praxair has many of the favorable characteristics that make conservative investors comfortable with a stock. The gas giant has a lofty valuation at the moment, but its track record of steadily increasing dividends over time shows its ability to weather economic storms.
Praxair produces a variety of industrial gases, primarily in North America. In addition, it makes the equipment necessary to use those gases, such as welding equipment. The company also makes surface coatings that protect metal from corrosion, wear, and high temperatures.
Praxair boasts an impressive customer list for its products. The gas maker has helped several companies in the energy industry, including ExxonMobil (NYS: XOM) , BP (NYS: BP) , and Valero (NYS: VLO) . But Praxair has diversified exposure, with its electronics division counting Trina Solar (NYS: TSL) among its clients, and Johnson Controls (NYS: JCI) also using Praxair's products.
The company's business lines lead it into some interesting areas. For instance, the country of Abu Dhabi recently brought in Praxair to improve oil production from a heavy-oil field.
Retirees and other conservative investors have to appreciate Praxair's performance during the past decade. That growth record could continue if the global economy continues to grow, supporting demand for industrial products. As a cyclical play, Praxair would make a reasonable addition to many investors' 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 Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.
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