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.
Along with global economic growth come challenges in maintaining clean, sanitary conditions for everyone. Keeping clean has become big business, and Ecolab (NYS: ECL) is helping its customers do just with a variety of products. With economies slowing around the world, though, has the company been able to keep itself moving forward? Below, we'll revisit how Ecolab 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 Ecolab.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Ecolab last year, the company has lost a point. A drop in free cash flow is responsible for the loss, but the stock has done well, picking about 30% in the past year.
Ecolab is a market leader in the cleaning and sanitation industry, helping customers from hospitality and food service companies to government institutions with cleaning products, pest control, and other related services. With customers from McDonald's (NYS: MCD) and Yum! Brands (NYS: YUM) down to more modestly sized businesses, Ecolab benefits not only by putting its systems in place but also by collecting recurring revenue from ongoing sales of supplies.
But Ecolab's stock has become somewhat expensive-looking lately. That's due largely to its $5.5 billion acquisition of Nalco Holdings, which closed in December 2011. Because the merged company doesn't include all of Nalco's premerger earnings, multiples are artificially high at the moment. Moreover, Ecolab has methodically created growth through acquisition in the past.
Ecolab has decided to make another huge move toward a fast-growing business, agreeing to acquire privately held Champion Technologies for $2.2 billion. By doing so, Ecolab will further cement its competitive position in the specialty oil-field chemicals industry against Halliburton (NYS: HAL) and Schlumberger (NYS: SLB) , with Ecolab picking up roughly 40% of the market.
For retirees and other conservative investors, Ecolab's dividend yield is a bit disappointing after two decades of consistent payout growth. Yet with so much potential, the stock may be one that more risk-tolerant investors can feel comfortable paying up for.
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.
The best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Will Ecolab Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Ecolab, Halliburton, and McDonald's. Motley Fool newsletter services recommend Halliburton and McDonald's. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.