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. Let's figure out what makes a great retirement-oriented stock, then examine whether Eastman Kodak (EK) has what we're looking for.
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.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$869 million||Fail|
|Consistency||Revenue growth > 0% in at least four of five past years||0 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||1.48||Fail|
|Worst loss in past five years no greater than 20%||(68.7%)||Fail|
|Valuation||Normalized P/E < 18||6.11||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||NM||NM|
|Total score||1 out of 9|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes
With just one point, Eastman Kodak has almost nothing that conservative investors are looking for in a stock. The company that popularized photography has seen a decline that serves as a good lesson to conservative investors who rely too much on their stocks being able to keep up with the times.
Kodak has tried to respond by moving into digital technology. It recently received a favorable ruling in a patent infringement suit against Apple (AAPL) and Research in Motion (RIMM) focusing on image previewing features in their smartphones. But in trying to compete with photo printers aimed at consumers, Kodak ran into Hewlett-Packard (HPQ) and its formidable presence in the printer market.
But the company has made strategic mistakes as well. Once a pioneer of organic LED displays, Kodak sold its OLED business, leaving up-and-comers like Universal Display (PANL) with an easier path to success in the industry.
Whether the company can update itself as a digital-photography giant remains to be seen. Unfortunately, for long-term shareholders, the damage has already been done. What Kodak can best teach you is that even industry leaders are vulnerable to changing trends, and if you don't stay vigilant, you can get caught up in a downdraft from which you may never recover.
Finding 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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Universal Display is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended a bull call spread position on Apple, which is a Motley Fool Stock Advisor selection. The Fool has written puts on and owns shares of Apple. 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 Fool has a disclosure policy.
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