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.
There's an old adage that says that when it comes to investment management companies, it pays more to invest in the companies themselves than it does to follow the advice they give and invest in the funds they offer. For BlackRock , that's certainly been the case lately, as the leading ETF provider with trillions of dollars under management has produced impressive share-price gains. But how can the company defend its turf from up-and-coming competitors? Let's revisit how BlackRock 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 BlackRock.
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.
Since we looked at BlackRock last year, the company has kept its 6-point score. But the shares have soared more than 20% over the past year, including a nearly 15% gain just in January.
BlackRock is the poster child for the success of the exchange-traded fund market. Having bought the iShares line of ETFs from Barclays back in 2009, BlackRock has benefited greatly from the iShares business, counting on it as a major source of assets to manage.
BlackRock has simply dominated most of its ETF peers. Although Vanguard has held its own with its low-cost niche, State Street has struggled to hold onto its No. 2 spot in the industry. Unsatisfied with its dominance, BlackRock has made moves to grow by acquisition, buying up the ETF line of European financial giant Credit Suisse to give BlackRock a bigger presence on the Continent.
In its most recent quarterly report, BlackRock shattered a host of company records, including hitting the $3.8 trillion mark in assets under management and posting $690 million in GAAP earnings on $2.54 billion in revenue. Full-year 2012 results were equally impressive, and the company pushed its dividend up by 12%.
For retirees and other conservative investors, BlackRock's shares are somewhat pricey at the moment. Yet with substantial dividend increases and a promising future as the king of the ETF world, BlackRock is a reasonable choice for retirement investors looking for exposure to financials that don't carry any credit risk.
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 BlackRock Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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