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.
Sometimes, it's the least glamorous companies that make the best investments. Genuine Parts (NYS: GPC) certainly makes that argument, as the maker of auto parts has one of the longest dividend-raising streaks in the U.S. stock market. But even though parts-makers have benefited from the trend of car owners holding on to their vehicles longer, has Genuine Parts squeezed everything it possibly can from that trend already? Below, we'll revisit how Genuine Parts 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 Genuine Parts.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$9.6 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.76||Pass|
|Worst loss in past five years no greater than 20%||(15.0%)||Pass|
|Valuation||Normalized P/E < 18||16.68||Pass|
|Dividends||Current yield > 2%||3.2%||Pass|
|5-year dividend growth > 10%||6.0%||Fail|
|Streak of dividend increases >= 10 years||56 years||Pass|
|Payout ratio < 75%||48.2%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Genuine Parts last year, the company has kept its seven-point score. But a nice climb of almost 20% in its stock price reveals some of the success that Genuine Parts has had even in a slow-growing economic environment.
Genuine Parts is a big name in the auto-parts industry. With its NAPA Auto Parts stores, the company has a very strong presence in the direct-retail front, despite plenty of strong competition. Both AutoZone (NYS: AZO) and Advance Auto Parts (NYS: AAP) have been opening new stores to try to take advantage of the trend toward owning used cars as long as they can still run.
But Genuine Parts distinguishes itself from competitors in a couple of ways. First, it has completely different businesses under its umbrella, supplying parts for use in industrial, office, and electrical-industry applications. Also, Genuine Parts boasts strong relationships with commercial customers, and even though Advance Auto Parts and O'Reilly Automotive (NAS: ORLY) have done their best to take a bite out of that business, Genuine Parts have done a good job defending its turf.
For retirees and other conservative investors, 56 straight years of higher dividends shows you Genuine Parts' ability to weather countless past economic storms. With more than a few things going in its favor today, Genuine Parts has the capacity to be an all-weather component of a retirement portfolio for years to come.
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.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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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