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.
Starbucks (NAS: SBUX) revolutionized the coffee industry with its landmark retail locations and has become a world-renowned brand. After facing a huge challenge during the financial crisis, Starbucks bounced back against heavy competition to prove its competitive advantages over its peers. Now, with the stock having risen sharply in recent years, the question is whether Starbucks has the growth prospects that investors want. Below, we'll revisit how Starbucks 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 Starbucks.
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%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes. *Annual dividend growth since first dividend payment in April 2010.
Since we looked at Starbucks last year, the company has kept its four-point score. But the stock has risen by about 30% as it has made some smart strategic moves to cement its position in the industry.
Starbucks has taken some big steps forward in the coffee wars. Even as Green Mountain Coffee Roasters (NAS: GMCR) threatened to make coffee shops unnecessary with its Keurig K-Cup systems, Starbucks struck back. Not only did the company enter a partnership with Green Mountain to sell its coffee in K-cups, but Starbucks also said it would introduce Verismo, a single-serve brewer of its own. By hedging its bets, Starbucks ensures itself of victory regardless of how the Verismo rollout goes.
Meanwhile, Starbucks has moved forward in seemingly every direction. Its Seattle's Best Coffee division made an agreement with Coinstar (NAS: CSTR) to sell coffee in kiosks around the country. It bought San Francisco bakery La Boulange and juice specialist Evolution Fresh, and it plans to open Tazo tea stores as well. By moving at lightning speed, Starbucks is making it hard for McDonald's (NYS: MCD) and Dunkin' Brands (NAS: DNKN) to keep up.
For retirees and other conservative investors, revenue growth hasn't brought improved free cash flow, but that isn't all that surprising given the company's rapid expansion plans. At current valuations, it's hard to recommend that risk-averse investors get into the stock, but it's worth keeping an eye on to see if you get a buying opportunity.
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.
If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Green Mountain Coffee Roasters, Starbucks, and McDonald's. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, McDonald's, and Starbucks, as well as creating a lurking gator position in Green Mountain Coffee Roasters, writing covered calls on Starbucks, and writing naked calls on Dunkin' Brands. 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.