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.
United Technologies made its way into the elite 30 companies of the Dow Jones Industrials by having a conglomerate's presence in a variety of businesses, ranging from elevators to air conditioners. But lately it has doubled down on its core aerospace engine and components business. Will the move pay off, given the booming market for commercial aircraft? Below, we'll revisit how United Technologies 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 United Technologies.
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%
5 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at United Technologies last year, the company has seen its score drop by three points due to falling growth and higher earnings valuations. The stock has climbed almost 10% over the past year, though, reflecting enthusiasm over its future prospects.
United Tech has made some big moves over the past year, spending $16.5 billion and assuming another $1.9 billion in debt to buy out aircraft-component maker Goodrich last July. This, combined with UTC's decision to divest itself of its Pratt & Whitney Power Systems business and its UTC Power fuel-cell segment, has changed United Tech from a highly diversified conglomerate into a company much more focused on aerospace.
That move may turn out well for United Tech. Boeing has projected that the commercial-aerospace industry has the potential to bring in $4.5 trillion in revenue over the next 20 years. United Tech is a major supplier to Boeing and the rest of the industry, and it's now looking to grab a bigger piece of that growing pie.
The challenge that United Tech faces is in shifting its focus to higher-margin sales. Its U.S. revenue, which makes up 56% of its overall sales, only brings in 45% of the company's profit, while its Asia-Pacific and European sales are much more profitable. Given potential U.S. defense cuts, United Tech should focus on international growth both to protect its overall revenue and to boost its profitability.
For retirees and other conservative investors, United Tech may have limited future dividend growth with its acquisition of Goodrich, which required a big boost in debt. Given United Tech's fairly high valuation and some degree of uncertainty as the company integrates Goodrich's operations into its larger fold, United Tech may be better to put on the back burner in the hopes that valuations will become a bit more attractive in the near future.
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.
United Tech is a player in aerospace in its own right, but to reach its full potential, it also needs Boeing to succeed. Find out more about Boeing's big opportunity in our premium research report, in which we examine whether Boeing can succeed in the multitrillion-dollar aircraft industry. Our best industrial analysts have collaborated to provide investors with the must-know info on Boeing. They'll be updating the report as key news hits, so be sure to claim a copy today by clicking here now.
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The article Will United Technologies 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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