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.
Many companies that built their reputations decades ago are still enduring today. One of them is Pitney Bowes (NYS: PBI) , which dominated the mail services industry with its postage meters and other shipping-related equipment. But with the rise of the Internet and the fall of the U.S. Postal Service, Pitney Bowes finds itself scrambling to adjust to a new reality. Can it make the transition successfully? Below, we'll take a look at how Pitney Bowes 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 Pitney Bowes.
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%
Five-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.
With just four points, Pitney Bowes doesn't have everything conservative investors prefer to see in a stock. Investors also aren't happy with the stock's performance, as the shares have dropped about 30% over the past year.
Pitney Bowes has done its best to adapt to changing conditions in the postal realm. Although Stamps.com (NAS: STMP) has taken the lead in direct sales of online postage to consumers and small businesses, Pitney Bowes has instead focused on becoming a postage-services provider for third-party sellers. For instance, the company works with eBay (NAS: EBAY) and earns a fee every time a seller uses its service to send a package by the U.S. Postal Service.
But Pitney Bowes isn't just about the U.S. mail. It's working with FedEx and United Parcel Service (NYS: UPS) to try to capture more revenue from online shipments that bypass the USPS. More importantly, a more recent deal with Facebook (NAS: FB) centers on supplying software for geocoding, which can help businesses pinpoint exactly where their customers are. These services need to become a bigger part of Pitney Bowes' business in order for the company to prosper.
In the end, though, the key to Pitney Bowes' appeal among investors is its double-digit dividend yield. With a substantial amount of debt on the balance sheet, many fear that a dividend cut could come soon.
For retirees and other conservative investors, Pitney Bowes has become a somewhat speculative turnaround play that lacks the stability that most people prefer in their retirement portfolios. The income looks appealing at current levels, but with recent drops in sales and free cash flow, it's hard to recommend Pitney Bowes as a retirement stock.
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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The article Will Pitney Bowes Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of eBay, United Parcel Service, Facebook, and FedEx. 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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