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.
American States Water (NYS: AWR) is a company at the forefront of one of the biggest potential investing trends for the 21st century: water infrastructure. As fresh water becomes an ever-more precious commodity, the companies that supply it to a thirsty public will become increasingly important. Is there money to be made here, or will delivering a necessity to customers prove to be merely a break-even proposition? Below, we'll revisit how American States Water 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 American States Water.
What We Want to See
Pass or Fail?
Market cap > $10 billion
Revenue growth > 0% in at least four of past five 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 American States Water last year, the company has kept its seven-point score. The stock has also treated investors well, with a roughly 25% gain over the past year.
American States Water is a water utility that focuses primarily on the desert Southwest region. Given the huge populations in the area, especially in growing Arizona, the company has been able to capitalize on growth to provide strong returns for decades.
Yet American States is a relatively small player in a big industry. With national rivals American Water Works (NYS: AWK) and Aqua America (NYS: WTR) serving huge portions of the country, they have the muscle to outpunch American States. Moreover, growth opportunities like water for hydraulic fracturing put American Water Works in better position than American States, whose limited service area doesn't include massive shale plays like the Marcellus.
One possibility, though, is that a bigger company might end up buying American States. Both American Water Works and Aqua America have used acquisitions to bolster their growth, and with international giant Veolia Environnement (NYS: VE) having largely ceded the U.S. water market to existing players, they may feel more comfortable making a bigger buyout. In fact, between American States and California Water Service (NYS: CWT) , two companies with similar coverage areas would give both bigger industry players a chance to boost their western exposure.
For retirees and other conservative investors, the 58-year record of higher dividends that American States offers is nearly unparalleled. With a reasonable valuation, room for growth, and buyout potential, American States could make a nice stock for a typical retirement portfolio.
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 American States Water 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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