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.
Among the companies that make essential products that millions of people use every day, Kraft Foods (NYS: KFT) appears near the top of the list. With a wide variety of food products ranging from its signature macaroni and cheese to a big line of snack crackers, Kraft commands a lot of pantry space. But with the company planning to break itself into two companies, will the sum of the parts be greater than the whole? Below, we'll revisit how Kraft Foods 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 Kraft Foods.
|Size||Market cap > $10 billion||$68.3 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||4 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.54||Pass|
|Worst loss in past five years no greater than 20%||(14.6%)||Pass|
|Valuation||Normalized P/E < 18||20.72||Fail|
|Dividends||Current yield > 2%||3%||Pass|
|5-year dividend growth > 10%||3.9%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||57.9%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Kraft Foods last year, the company has kept the same score. The company will look a lot different next year, though, with big ramifications for both Kraft and its competitors.
Kraft has put in strong stock performance over the past year, with a gain of about 20%. Much of the gain has come from the company's plans to break itself into two separately traded companies. Kraft plans to spin off its North American grocery business, hanging onto its current snack and candy businesses.
The split will let each business focus on competing more strongly in their respective industries. For the snack business, rivals Diamond Foods (NAS: DMND) and now Kellogg (NYS: K) have tried to make strategic acquisitions to boost their presence in the international snack market. Kraft's split not only hits back at Kellogg and Diamond, but also tries to challenge PepsiCo's (NYS: PEP) emerging-markets strategy. Meanwhile, the U.S. grocery business will be a more mature but arguably less exciting segment that should nevertheless appeal to income-hungry investors.
For retirees and other conservative investors, the big question is whether Kraft after the split will continue to build its strong brand name and good reputation. If it doesn't, then Kraft may no longer be the right stock for retirement investors to rely on for long-term success.
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.
If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
Add Kraft Foods to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.
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 PepsiCo. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in PepsiCo. 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.