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.
Investors may not know the McGraw-Hill (NYS: MHP) name very well, but they almost certainly know about its products. With its Standard & Poor's division, the company provides plenty of financial information for investors. But McGraw-Hill also publishes educational textbooks and provides other teaching tools for students. Still, with S&P's reputation somewhat tarnished from its failure to detect the mortgage meltdown in advance, can the company improve its image? Below, we'll revisit how McGraw-Hill 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 McGraw-Hill.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at McGraw-Hill last year, the company has lost a point due to falling free cash flow. But with the stock up about 5% in the past year, most investors aren't complaining too much.
McGraw-Hill's conglomeration of businesses can be somewhat confusing for investors. On one hand, its publishing business competes with Pearson (NYS: PSO) and other book publishers. In that business, the rise of e-readers and other mobile devices has McGraw-Hill scurrying to find ways to work with Amazon.com (NAS: AMZN) and Apple (NAS: AAPL) to get into their tablet ecosystems in a way that protects the publisher's profits. On the other hand, though, the company's financial information division provides specialized data, competing against Thomson Reuters (NYS: TRI) and privately held Bloomberg.
In an attempt to end that confusion and boost shareholder value to make activist institutional investors happy, McGraw-Hill decided to spin off its educational business into a separate company, keeping the financial services side of the company under the McGraw-Hill Financial name. The move should be done by the end of the year.
Following the spinoff, investors will have an interesting choice. The financial division has higher growth prospects with rising subscription revenue. The publishing division, on the other hand, has been trying to boost margins even in the face of sagging sales. With a choice between a financial industry leader and a publishing company poised for a turnaround, investors after the split will have two very different businesses to look at.
For retirees and other conservative investors, the spinoff will undoubtedly shake up the status quo of slow but steady dividend growth over the decades. Although many stocks have risen preceding spinoffs, you may get a better entry point by waiting until after the spinoff and picking whichever side of the business fits your risk profile more closely. At current prices, taking a wait-and-see approach on McGraw-Hill could be the most prudent move you can make.
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 McGraw-Hill, Apple, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Apple and Amazon.com, as well as creating a bull call spread position in Apple. 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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