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.
Marriott (NYS: MAR) is one of the most popular hotel chains among travelers, with an extensive network of domestic hotels combined with well-placed properties throughout the world. But during tough economic times in many places across the globe, corporate customers are cutting back, and revenue is plunging. How can Marriott turn the tide back toward growth? Below, we'll revisit how Marriott 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 Marriott.
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.
Since we looked at Marriott last year, the company has lost a point, due to a drop in revenue compared to last year. But the stock has posted a reasonably nice gain of about 20% over the past year.
The hotel industry has had to deal with the double-hit of overall economic weakness combined with reluctance of businesses to spend on travel. Even though Starwood Hotels (NYS: HOT) has much greater international exposure than Marriott, both companies have seen fallout from troubles in areas like China and Europe.
Yet more recently, things have started to turn around for Marriott. In its third quarter, which it released in early October, Marriott said earnings per share grew by more than 50% from last year's quarter, beating expectations. The hotelier pointed to strong corporate bookings as well as pricing power as potential drivers for future growth.
Marriott is also making inroads into emerging markets. With a new partnership with Ctrip.com (NAS: CTRP) , Marriott will offer Ctrip rewards points for stays at Marriott hotels. The move could pay off for both companies by encouraging loyalty in order to earn rewards.
Still, Marriott is a tough sell for many investors. With Starwood, Wyndham Worldwide (NYS: WYN) , and Choice Hotels (NYS: CHH) looking arguably more attractively valued, you have to believe in Marriott's growth story being superior to its competitors and continuing into the next two years and beyond in order to justify paying up for the stock.
For retirees and other conservative investors, the combination of a relatively rich stock price and a fairly weak dividend are two strikes against the hotel stock. Most investors would do better to wait for a pullback rather than paying up for Marriott shares today.
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.
Check out our free report: These Could Skyrocket After the 2012 Presidential Election. Barack Obama and Mitt Romney have competing visions for getting America back on track, but The Motley Fool will have you prepared to profit -- no matter who wins! Download your copy now, for free, and discover hidden ways to profit from the election.
Add Marriott to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
The article Will Marriott 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 Choice Hotels and Ctrip.com. Motley Fool newsletter services recommend Ctrip.com. 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.