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.
Procter & Gamble appeals to conservative investors because of the solid, predictable nature of its business. Selling things that people need ensures stability even under tough economic conditions, and its two dozen brands, which bring in more than $1 billion in revenue, explain why the consumer giant has been part of the Dow Jones Industrials for more than 80 years. Below, we'll revisit how Procter & Gamble 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 Procter & Gamble.
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%
Five-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 Procter & Gamble last year, the company has lost a point, as a drop in revenue broke the company's sales-gain streak. The stock is up about 15% over the past year despite the challenges the company has faced recently.
Procter & Gamble is a classic defensive stock. By offering so many products that billions of customers need around the world, P&G gives investors a buffer against changes in economic conditions that have more dramatic impacts on stocks in other industries.
But from an investing standpoint, Procter and consumer-giant peers Kimberly-Clark and Colgate-Palmolive don't look as attractive as they often do, because their valuations have risen sharply. The overall demand for dividend stocks and some recent skittishness in the market after its four-year bull run have pushed the earnings multiples of Kimberly-Clark and Colgate-Palmolive above 20, and although those smaller rivals arguably have better growth prospects than P&G, they nevertheless are in an industry that's known more for sales stability than massive growth.
Still, P&G has soared following its most recent quarterly report. Despite margin pressure from high commodity costs and the impact of Venezuela's decision to devalue its currency, the consumer goods giant is looking to reinvigorate its product-offering pipeline, addressing some of the concerns activist investor Bill Ackman has raised.
For retirees and other conservative investors, P&G's fairly high valuation is somewhat problematic. But with peers in the space fetching similarly high multiples, retirement investors may nevertheless want to consider giving Procter & Gamble a place in their retirement 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.
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The article Will Procter & Gamble Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. 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.