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.
For many young kids, a job involving getting paid to help people make peanut butter and jelly sandwiches probably sounds just about perfect. But J.M. Smucker (NYS: SJM) has turned peanut butter, jelly, and a host of other food products into a highly profitable business. As simple as the business may sound, though, plenty of competitive and pricing pressures affect Smucker's profitability. How's the PB&J giant doing right now? Below, we'll revisit how J.M. Smucker scores 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 J.M. Smucker.
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%
7 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at J.M. Smucker last year, the company has maintained its seven-point score. Shareholders have enjoyed the positive benefit that a nearly 20% rise in the stock's price has brought.
Smucker may be best known for its jellies and jams, but it's a well-diversified food business. From juices and baking ingredients to pre-made frozen sandwiches, Smucker has its hand in all sorts of popular food items.
One of the most competitive parts of Smucker's business is coffee. With Green Mountain Coffee Roasters (NAS: GMCR) having innovated single-serve coffee and Starbucks (NAS: SBUX) fighting it out with Dunkin' Brands (NAS: DNKN) and a host of other coffeehouses, it's easy to forget about store-bought coffee. But Smucker has the Folgers brand, and it has cashed in on the K-Cup revolution quite well as an alternate way to get high-margin business for its coffee.
Still, like much of the industry, Smucker has to watch food-price inflation as it obtains the ingredients it needs for its products. Food distributor Sysco (NYS: SYY) is on the front lines of higher food costs given its massive demand to support its institutional customers, but Smucker certainly sees it in its business as well.
For retirees and other conservative investors, Smucker's 15-year history of substantial dividend growth is definitely a positive sign, as is the stock's lack of volatility. Despite a somewhat rich valuation, many investors would likely feel very comfortable adding Smucker as a core holding for their 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.
Folgers may be well known, but the name of the game in coffee right now is single-serve. After pioneering the industry, Green Mountain is struggling to survive questions about its accounting and increased competition against its Keurig brewers. To get the very latest on Green Mountain, read our premium report on the coffee stock today. Our top analysts reveal all and provide updates for a full year, so don't miss out -- check it out today.
Add J.M. Smucker to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
The article Will J.M. Smucker Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Green Mountain and Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, SYSCO, and Green Mountain; writing naked calls on Dunkin Brands; writing covered calls on Starbucks; and creating a lurking gator position in Green Mountain. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.