Is Green Mountain Coffee Roasters the Right Stock to Retire With?

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.

Oil may be the lifeblood of industry, but coffee is the lifeblood of the working class. For years, Green Mountain Coffee Roasters (NAS: GMCR) has seen amazing growth from its Keurig single-serving coffee machines, which have made millions eliminate the morning pot of coffee in favor of make-as-you-go java. But aggressive short-sellers along with an SEC investigation helped let the air out of Green Mountain's lofty stock price. Will the coffeemaker-maker get a much-needed jolt? Below, we'll look at how the company 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 Green Mountain Coffee Roasters.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $7.2 billion Fail
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.81 Pass
  Worst loss in past five years no greater than 20% (4.9%) Pass
Valuation Normalized P/E < 18 36.17 Fail
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Streak of dividend increases >= 10 years NM NM
  Payout ratio < 75% NM NM
       
  Total score   3 out of 8

Source: S&P Capital IQ. Total score = number of passes.

With only three points, Green Mountain Coffee Roasters isn't giving conservative investors much of a morning wakeup. With no dividend and an earnings multiple that's still quite high even after the stock's big pullback, Green Mountain needs to resolve some of its problems before investors can feel more comfortable about its future prospects.

From a business perspective, Green Mountain has had a lot of things go its way lately. Its K-Cups now have much greater exposure on retail shelves, and the company has signed up major distribution partners to broaden its sales. Starbucks (NAS: SBUX) made big news earlier this year when it reached an agreement with Green Mountain to produce and market K-Cups, rather than coming up with its own rival single-serve machine to fight the Keurig. Similarly, newly public Dunkin' Brands (NAS: DNKN) has gotten on board with its own K-Cups as well, not wanting to miss the bandwagon.

But the company faced a bear attack from hedge fund investor David Einhorn, who argued that accounting concerns, high valuations, and expiring K-Cup patents would combine to bring the stock lower. Sure enough, when earnings came out, Green Mountain missed estimates for the first time in years.

Still, Green Mountain has some leverage. Coffee Holding (NAS: JVA) gets about half of its revenue from Green Mountain and Keurig-related sales. Caribou Coffee (NAS: CBOU) also has a close relationship with the company. That state of affairs makes the entire industry dependent to some extent on Green Mountain -- and therefore it's in all those companies' best interest to have Green Mountain succeed.

For retirees and other conservative investors, though, the lack of dividend is extremely troubling. Moreover, the relatively tame year-to-year stock price changes mask a whole lot of volatility within calendar years. Even with shares at much lower prices, it's a tough sell to recommend Green Mountain as a play for anyone but the most risk-tolerant retirement investor.

Keep searching
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.

Add Green Mountain Coffee Roasters to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the " 13 Steps to Investing Foolishly ."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters and Starbucks, as well as creating a lurking gator position in Green Mountain Coffee Roasters. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Investing Like Warren Buffett

Learn from one of the world's best investors.

View Course »

Portfolio Basics

What are stocks? Learn how to start investing.

View Course »

Add a Comment

*0 / 3000 Character Maximum

1 Comment

Filter by:
isoconsultants

Einhorn has GMCR nailed: the sales of K Cup brewers has stalled and the margins on the K Cups will be cut by 75% after the patent expires; GMCR will soon be a $20 stock, even with the marketing deals with Starbucks & other brands.

January 04 2012 at 2:12 PM Report abuse rate up rate down Reply