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.
In a world where people willingly pay for bottled water even where cheap, plentiful, clean tap water is readily available, it seems like it's only a matter of time before people start paying for air as well. In a sense, Praxair (NYS: PX) already profits from the gases that make up Earth's atmosphere, providing basic elements for a variety of commercial and personal uses. How long can the company keep this lucrative business going? Below, we'll revisit how Praxair 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 Praxair.
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 Praxair last year, the company has picked up a point, with its dividend yield poking up above the 2% level. The stock hasn't risen very far, though, with just over a 5% gain in the past year.
Praxair makes a number of atmospheric and specialty gases, but it also supplies high-performance coatings for industrial use as well. It stands out from its competitors primarily in the areas that it serves. Whereas Airgas (NYS: ARG) focuses on the U.S. market, Praxair and Air Products & Chemicals (NYS: APD) both have a more global reach. But Praxair offers specific exposure to the South American market, which has benefited from substantial growth both in emerging market power Brazil as well as in the frontier markets on the continent.
Unfortunately, Praxair has taken on substantial debt, with a debt-to-equity ratio well over 100%. In addition, the company has suffered from the European financial crisis and its impact on markets there, as well as from Brazil's slowdown. A relatively strong dollar has also hurt its results in the short run.
Still, Praxair is finding lucrative business opportunities. Just last month, it signed a 15-year agreement with Honeywell (NYS: HON) to provide carbon dioxide for Honeywell's food freezing and processing business. Combined with a longtime relationship with BP (NYS: BP) to provide hydrogen at an Indiana refinery, Praxair has done well in its role facilitating other companies' operations.
For retirees and other conservative investors, Praxair's history of dividend growth is impressive, even if its valuation is somewhat steep. For those willing to pay up for a solid company, though, Praxair is worth further consideration.
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.
While you can certainly make huge gains by focusing on industrial stocks, the best investing approach is to choose great companies from a variety of sectors 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 Praxair Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.
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