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.
Four years hasn't been nearly enough to forget the memories of the collapse in financial stocks. For investors in Citigroup (NYS: C) , huge losses have wiped out the vast majority of their shares' value, and dilution from government bailouts has made it nearly inconceivable that the bank will ever fully recover. Yet for those looking to buy in now, could the stock provide enough upside to justify an investment? Below, we'll take a look at how Citigroup 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 Citigroup.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With only three points, Citigroup doesn't give conservative investors much of what they seek in a stock. Yet the shares are up 30% in the past year as banks get a breath of life from an improving economy.
The past several years have been extremely difficult on banks. After coming to the brink of collapse during the 2008 bear market, increased regulatory scrutiny has prevented banks from using the same leveraged-heavy business models to try to restore profits. Although JPMorgan Chase (NYS: JPM) , US Bancorp (NYS: USB) , and Wells Fargo (NYS: WFC) have all successfully raised their dividends, Citigroup failed the most recent round of stress tests and has therefore been forced to maintain its $0.01 per share payout indefinitely.
Yet by some indications, the worst may be over. Although Citi will end up paying a big chunk of the industry's costly $25 billion settlement over claims related to questionable foreclosure practices, the settlement at least closes one chapter from the housing bust. Slowly but surely, the bank is moving forward and getting its balance sheet into better shape.
The big question now is whether the recent third round of quantitative easing from the Federal Reserve will push bank stocks higher. Despite Citigroup's recent rise, Fool analyst Paul Chi believes the bank is succeeding in getting its bad loans resolved, yet shares continue to trade at just a fraction of book value.
For retirees and other conservative investors, it's still too early to tell whether Citigroup will ever recover to its former glory. Yet with shares priced at attractive levels, the more risk-tolerant retirement investor may want to consider whether Citigroup is worth taking a flyer on.
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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The article Will Citigroup Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns warrants on JPMorgan Chase and Wells Fargo. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. 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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