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 are used to using the word "growth" to refer to a wide array of rising figures. But for a few stocks, "growth" is a literal expression of success. Mosaic's (NYS: MOS) fertilizer products help farmers boost their crop yields, leading to growth not just in individual plants but for entire food supplies. Producing fertilizer costs money, though, and the costs have been on the rise lately. Can Mosaic keep its profits high in face of those challenges? Below, we'll revisit how Mosaic 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 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 Mosaic.
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.
Since we looked at Mosaic last year, the company has dropped a point. The stock has been somewhat kinder to shareholders, though, rising about 15% in the past year.
Mosaic has had to deal with competing trends recently. On one hand, Mosaic and fellow potash producer PotashCorp (NYS: POT) have had to deal with the huge competitive disadvantage of high mining costs and low sales volumes for its fertilizer products. That stands in stark contrast to nitrogen-based fertilizer producersTerra Nitrogen (NYS: TNH) and CVR Partners (NYS: UAN) , which have benefited from rock-bottom prices for natural gas, a key raw material in nitrogen fertilizer production. Agrium (NYS: AGU) , which produces both types of fertilizer, has held up well, in large part due to its exposure to nitrogen.
But with the extreme drought that the U.S. suffered during the 2012 growing season, Mosaic and its peers should benefit from greater need for fertilizers to help farmers recover next year. The belief that fertilizer prices will increase as a result is behind Mosaic's decision to boost its dividend two quarters in a row, with the payout now five times greater than it was a year ago.
Still, those benefits haven't shown up just yet. Earlier this week, Mosaic missed earnings estimates by almost 14%, reporting an 18% year-over-year drop in net income on 19% weaker sales.
For retirees and other conservative investors, Mosaic is a somewhat volatile play on the agriculture industry. If you believe in the growth story for ag-related stocks, however, then Mosaic is worth a closer look as a potential addition to your retirement portfolio.
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 single 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.
Add Mosaic to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
The article Will Mosaic Help You Retire Rich? originally appeared on Fool.com.
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. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.