Will Disney Help You Retire Rich?

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.

Disney (NYS: DIS) is one of the first companies that most children ever encounter. But the company once best known for its children's movies and theme parks has turned into a media and entertainment empire, with its ownership of ABC and ESPN as well as its own cruise line and retail outlets. With all this growth, the big question is whether Mickey Mouse's company can keep delivering in all of its segments. Below, we'll revisit how Disney 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 Disney.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $79.4 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 2 years Fail
Stock stability Beta < 0.9 1.17 Fail
  Worst loss in past five years no greater than 20% (28.7%) Fail
Valuation Normalized P/E < 18 15.39 Pass
Dividends Current yield > 2% 1.4% Fail
  5-year dividend growth > 10% 14.1% Pass
  Streak of dividend increases >= 10 years 2 years Fail
  Payout ratio < 75% 20.8% Pass
       
  Total score   5 out of 10

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

Since we looked at Disney last year, the company has picked up a point. Accelerating dividend growth has been a positive sign for the company, which has generally done fairly well despite a drop in free cash flow.

Disney has had an up-and-down couple of years. On one hand, its theme park and leisure segment rode a wave of generally positive sentiment. As the economy started getting better, operators throughout the industry, including Cedar Fair (NYS: FUN) and Six Flags (NYS: SIX) , joined Disney with good results.

But movies are always a volatile part of Disney's business, and there, the studio hasn't been entirely dependable. Last summer, Cars 2 didn't meet expectations, although the latest of its Pirates of the Caribbean series did well. More recently, John Carter proved to be a $200 million disaster, but Avengers more than made up for it.

The big issue for Disney, though, is how it fares in the content wars springing up among cable operators, Apple (NAS: AAPL) and other big tech companies seeking to offer their own TV options, as well as rental/streaming companies like Netflix (NAS: NFLX) . With a lock on hugely valuable content generation, Disney should have the upper hand in naming its price with many content-seekers.

For retirees and other conservative investors, Disney shares have been more volatile than many would prefer to see, and its dividend is a bit stingy. But as a well-known name with plenty of growth potential, Disney will still look attractive to many nostalgic retirement investors looking to recapture part of their childhood.

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.

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 Disney 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. The Motley Fool owns shares of Walt Disney, Netflix, and Apple. Motley Fool newsletter services have recommended buying shares of Walt Disney, Apple, and Netflix, as well as creating a bull call spread position in 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.

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


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