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.
When companies like VF Corp. (NYS: VFC) have corporate names that hide their underlying businesses, it can be confusing for some investors. But with brands including North Face, Vans, and Wrangler, it has a strong stable of performers helping drive profits. But with a fair amount of European exposure, can VF weather tough economic times there? Below, we'll revisit how it 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 VF Corp.
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%
8 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at VF Corp. last year, the company has gained a point, with the stock's beta falling just enough to give it an extra point. The stock has done reasonably well, gaining about 15% over the past year.
VF has an impressive group of brands under its umbrella. Thanks to that diversity, the company has been able to survive some unusual challenges, such as last winter's extremely warm weather. Despite the obvious winter focus of its North Face brand, VF has continued to see impressive sales gains, with the company expected to post a better than 15% revenue boost in 2012 compared to last year.
But European troubles have hurt VF, especially as competition becomes extremely fierce on the continent. Although Polo Ralph Lauren (NYS: RL) has seen reduced shipments of wholesale merchandise, Michael Kors (NYS: KORS) and Calvin Klein/Tommy Hilfiger owner PVH (NYS: PVH) have both managed to push European same-store sales up dramatically even in the tough environment. High cotton prices earlier this year were also problematic for the company.
What's helping VF get through the tough times is its strong leadership. CEO Eric Wiseman has treated shareholders right, continuing a tradition of 40 years of annual dividend increases. More importantly, he's made great acquisitions while still not losing sight of the potential of VF's core brands. In particular, his integration of last year's Timberland purchase has been masterful. Some, including Fool contributor Sean Williams, believe that True Religion (NAS: TRLG) could make an interesting future acquisition target, given how its high-end focus could help augment VF's breadth of offerings.
For retirees and other conservative investors, the only downside for VF is a somewhat pricey valuation. Yet with consistency you'll rarely find from other companies, VF may well be worth paying up for in your 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.
VF is an industry stalwart, but Michael Kors is one of today's hottest high-end fashion brands, and that's made it one of the best-performing stocks in retail. But has Michael Kors finally become too expensive, or is there still room left to run? The Motley Fool's new premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.
Add VF Corp. to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.
The article Will VF Corp. Help You Retire Rich? originally appeared on Fool.com.