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.

The tobacco industry is a popular target for investors who aren't comfortable with the idea of profiting from an unhealthy product. Yet Lorillard (NAS: STSI) is a major player in the industry, with billions in revenue every year and hefty profit margins to boot. With public opinion seeming to limit smoking more and more each year, though, Lorillard's long-term future seems uncertain. Will tobacco companies end up losing everything? Let's revisit how Lorillard 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 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 Lorillard.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $16.5 billion Pass
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 3 years Fail
Stock stability Beta < 0.9 0.44 Pass
  Worst loss in past five years no greater than 20% (24.2%) Fail
Valuation Normalized P/E < 18 14.45 Pass
Dividends Current yield > 2% 4.9% Pass
  5-year dividend growth > 10% 13.9%* Pass
  Streak of dividend increases >= 10 years 4 years Fail
  Payout ratio < 75% 69.6% Pass
       
  Total score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.
*Four-year growth rate.

Since we looked at Lorillard last year, the company has kept its 7-point score. The shares, though, are up a respectable 15% or so in the past year.

Long before Lorillard went public, tobacco companies have faced threats from regulation and legal challenges. Lately, the regulatory environment has gotten a lot tighter, as the FDA has taken advantage of new powers to try to battle smoking. Although an appeals court turned back an FDA directive to include graphic images on cigarette packs, the long-term fight will continue to rage. Even international player Philip Morris (NYS: PM) has had to deal with heightened regulatory hurdles around the world.

Unlike Altria (NYS: MO) and Reynolds American (NYS: RAI) , though, Lorillard has been pushing into the e-cigarette market, with its acquisition of Blu Ecigs in April. Once seen as a minor fad more appropriate for niche player Star Scientific (NAS: CIGX) than for major tobacco companies, e-cigarettes are now seen having long-term growth potential. Moreover, the field isn't quite as competitive as other cigarette alternatives, such as smokeless tobacco.

The biggest threat Lorillard faces is the possible ban of menthol cigarettes. Lorillard's top-selling brand is Newport, the leading menthol cigarette that is the No. 2 brand in the U.S., trailing only Altria's Marlboro.

For retirees and other conservative investors, a yield approaching 5% is the sort of trade-off that might be worth taking the regulatory risk involved with Lorillard. The stock may not have the pedigree that Altria has, but as long as menthol doesn't get targeted specifically, Lorillard is at least worth considering for a retirement portfolio, especially at current valuations.

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 -- read it today.

Add Lorillard to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

The article Will Lorillard Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools don't 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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