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.
3M is widely misunderstood by casual investors who focus solely on its popular consumer products. But 3M didn't earn its place within the Dow Jones Industrials based on Post-it Notes; the company's roots as Minnesota Mining and Manufacturing reflect a much broader array of businesses ranging from medical supplies to lighting products and touch screens. Below, we'll revisit how 3M 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 3M.
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%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at 3M last year, the company has seen its score drop by two points as valuations increased and free cash flow fell over the past year. But the stock has done well, climbing more than 20% since we looked at the company this time last year.
Sticky little yellow pieces of paper are just one of the many ways that 3M has been a leader in innovation throughout its history. Decades ago, innovations like Scotch Tape and Scotchguard were highly visible new products that achieved general notoriety. But more recently, much of what 3M makes is components that improve other manufacturers' products, such as films for mobile devices and displays. With other companies' brand names on those products, 3M gets less exposure for its contributions, even though those business segments are successful.
The question is where 3M's growth will come from in the future. Recently, its organic growth has flagged, raising concerns that 3M is merely becoming a mature, dividend-paying value stock with little future growth potential. The company has turned to acquisitions, such as its recent buyout of Ceradyne, to help boost its footprint. But for 3M to remain true to its roots, it needs to innovate from within to drive sales and profits higher.
One area where 3M hopes to see growth is the natural-gas industry. By developing fuel tanks for natural-gas-powered vehicles in conjunction with Chesapeake Energy , 3M hopes to tap into the budding market for new applications for the plentiful and cheap fuel. Yet rival General Electric has a huge presence in the energy industry, with its wind turbine segment dominating the alternative-energy space. GE also has its own partnership with Chesapeake to help set up a network of natural-gas filling stations across the country. If 3M wants to succeed in energy, it will have to work hard to find its own niches within the broader space to drive profit growth, or else competition from GE could hamstring its efforts.
For retirees and other conservative investors, the fact that 3M has one of the longest dividend-raising streaks in the Dow is a definite positive. An elevated valuation as the stock hits all-time highs is a reason to hesitate, but over the long haul, 3M should be able to justify a slight premium if it can get back into its innovative groove.
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.
With more than 50,000 products, 3M plays a role in making everything from computers to power cables. A long history of invention and innovation has driven the company to its wide reach, but a focus on operational efficiency may be hurting the creative culture. Find out whether 3M has what it takes to pull it off in The Motley Fool's comprehensive new research report on the company. Simply click here now to claim your copy today.
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The article Will 3M Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends 3M. The Motley Fool owns shares of General Electric and has options positions on Chesapeake Energy. 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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