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.

You don't have to be an environmentalist to appreciate the value of being smart about managing power use. With oil prices having been at high levels for years, the impact on businesses around the world has been immense. For its part, Eaton (NYS: ETN) tries to help companies manage their power needs by producing components and systems that lead to higher energy efficiency and lower costs. But with concerns about a global economic slowdown, how will the company respond? Below, we'll take a look at how Eaton 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 Eaton.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$15.2 billion

Pass

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

3 years

Fail

Stock stability

Beta < 0.9

1.52

Fail

 

Worst loss in past five years no greater than 20%

(47.2%)

Fail

Valuation

Normalized P/E < 18

15.17

Pass

Dividends

Current yield > 2%

3.4%

Pass

 

5-year dividend growth > 10%

11.9%

Pass

 

Streak of dividend increases >= 10 years

3 years

Fail

 

Payout ratio < 75%

34.2%

Pass

       
 

Total score

 

5 out of 10

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

With five points, Eaton satisfies conservative investors on the dividend side of the equation, but growth has been a bit less dependable. The stock has posted about a 10% jump in the past year.

Eaton has actually seen a transformation in the direction its business has gone recently. Once, its biggest prospects seemed to be overseas, both in emerging markets as well as in more energy-conscious developed markets like Europe. Yet increasingly, Eaton has found that while international revenue has been weak, its U.S. market has done well. That's similar to what peer Parker Hannifin (NYS: PH) has seen, with big orders coming in from its North American region.

But Eaton sees big headwinds on the horizon coming from the impending fiscal cliff. Saying that the company is in "economic purgatory," Eaton CEO Alexander Cutler cut the company's full year guidance in late July.

Still, that isn't stopping Eaton from taking aggressive action. The company made an $11.8 billion offer for Cooper Industries (NYS: CBE) in order to expand its reach in the electrical equipment and power markets. Although the price was high, Fool analyst Isaac Pino argues that it was necessary in order to compete against rivals Emerson Electric (NYS: EMR) and ABB (NYS: ABB) , especially after ABB's purchase earlier this year of U.S.-based Thomas & Betts.

For retirees and other conservative investors, Eaton's future depends on its ability to foster growth. If it can gain a more stable footing with sales and free cash flow while retaining its healthy dividend, then Eaton could look even more attractive to those seeking an industrial stock for their retirement portfolios.

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.

Eaton has plenty of promise, but the best investing approach is to choose truly great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. ley Fool newsletter services have recommended buying shares of Emerson Electric. 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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