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.
Shopping malls have been a dangerous place to invest in recent years, as a recession has hurt consumer activity in many areas, leaving many malls partially empty and struggling to stay afloat. But Tanger Factory Outlet (NYS: SKT) has gotten through the past five years without ever posting a loss in its share price. What's the company's secret? Below, we'll revisit how Tanger Factory Outlet 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 Tanger Factory Outlet.
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. *Represents a gain; Tanger hasn't posted a loss in the past five years.
Since we looked at Tanger Factory Outlet last year, the company has kept its six-point score. The stock has continued its winning ways, though, climbing another 20% or so in the past year.
The retail REIT sector has had plenty of winners and losers. As with many real-estate related investments, location really matters, and Tanger's emphasis on outlet malls has resonated well in the difficult economic environment.
Moreover, malls have finally started to come back. Even with retail giant and frequent anchor-store operator Sears Holdings (NAS: SHLD) struggling to survive in a major reorganization, high-end mall REITs Simon Property Group (NYS: SPG) and Taubman Centers (NYS: TCO) have seen significant stock price gains in the past year, with revenue bouncing back. General Growth Properties (NYS: GGP) has also recovered well from its bankruptcy filing and has posted impressive growth through acquisition recently.
Tanger is also making some smart moves. With a new development planned for Connecticut's Foxwoods gambling mecca, strategically located between Boston and New York, Tanger could see a nice boost to its already prosperous fortunes.
For retirees and other conservative investors, a nearly two-decade record of higher dividends is a nice thing to see, even if Tanger's payout ratio is particularly high right now. Despite an inflated P/E, Tanger makes an interesting small-cap play for retirement investors who are comfortable going off the beaten path in their portfolios.
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 retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century, and the traditional shopping mall could be its next victim. Only those most forward looking and capable companies will survive, and they'll handsomely reward those investors that understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our premium research report. Uncovering these top picks is free today; just click here to read more.
Add Tanger Factory Outlet to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
The article Will Tanger Factory Outlet 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.