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.
In an era where corporate names seem to be the product of creative marketing teams and often bear no resemblance to what a business actually does, it's refreshing to see Air Products & Chemicals sticking to its basics of providing specialty gases and chemicals for the industries that need them. Below, we'll revisit how Air Products & Chemicals 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 Air Products & Chemicals.
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 Air Products & Chemicals last year, the company has kept its six-point score. The stock has languished, however, providing about a break-even return over the past year after adding in income from the company's dividend.
Air Products' tepid performance recently shows that even strong dividend stocks can run into temporary setbacks. For Air Products, high input costs have played a role recently in holding back the company's profits, with helium having been particularly expensive to obtain due to a global shortage.
But a rising technology in the auto industry could spell a huge opportunity for Air Products. Ford, Nissan, and Daimler announced earlier this year that they planned to develop a common fuel-cell system for use in hydrogen-powered electric vehicles. Seeing the enormous business potential in building out a hydrogen infrastructure network, Air Products is working with partner FuelCell Energy to build a network of fueling stations for the gas.
Another positive trend is the move to export liquefied natural gas. As a major supplier of equipment and process technology for to help energy companies handle LNG, Air Products stands to gain from its increased future use, especially if price disparities continue to support mass transport of LNG between different parts of the world.
For retirees and other conservative investors, Air Products high dividend yield and long history of dividend increases makes it an obvious choice in the industry. Praxair and Airgas have also been able to keep their dividend rising over the long haul, as they've both found their own successful niches in the industry. Still, Air Products' superiority on these measures, as well as its cheaper valuation, gives it an edge for retirement investors.
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.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Will Air Products & Chemicals Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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