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.

Many companies make products that you never see but that make it possible for other manufacturers to make other goods that you rely on. Illinois Tool Works (NYS: ITW) is one of those companies, which traditionally makes a wide array of goods ranging from vehicle fasteners to furniture laminates. Does it make sense to buy a company that's content to profit from behind the scenes? Below, we'll revisit how Illinois Tool Works 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 Illinois Tool Works.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$27.8 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

1 year

Fail

Stock stability

Beta < 0.9

1.17

Fail

 

Worst loss in past five years no greater than 20%

(32.7%)

Fail

Valuation

Normalized P/E < 18

16.88

Pass

Dividends

Current yield > 2%

2.5%

Pass

 

5-year dividend growth > 10%

9.9%

Fail

 

Streak of dividend increases >= 10 years

49 years

Pass

 

Payout ratio < 75%

29.5%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at Illinois Tool Works last year, the company's score has dropped by a point, with a slowdown in dividend growth causing the drop. But the stock has done extremely well even in a slow-growth economic environment, with shares rising more than 25% over the past year.

Illinois Tool Works definitely isn't a household name, but it has quietly made investors some big profits for a long time. Over the past 40 years, the company has posted annual returns of more than 13%, bringing investors 100-fold gains over that period.

But the company has had to deal with some tough situations. In November, company CEO David Speer died, forcing the company to name acting CEO Scott Santi to the position permanently. Given the speed of the move, it's clear the company had a succession plan in place, but it could still take a while for Illinois Tool Works to get fully up to speed again.

In addition, weak conditions in the company's key industries of transportation and construction have likely held Illinois Tool Works back. With auto giants Ford (NYS: F) and General Motors (NYS: GM) struggling in Europe, demand for the auto components that Illinois Tool Works makes has been threatened. Construction has similarly lagged, but continued strength in power systems and electronics components -- the company's most profitable segment -- has allowed it to stand up to competitor General Electric (NYS: GE) , even as it has aimed to dominate its industrial niches.

Earlier this month, Illinois Tool Works gave mixed guidance. For the current year, its sale of its Decorative Surfaces division pushed its adjusted earnings per share figures upward by more than $1.10 per share to a range of $5.19 to $5.29 per share. For 2013, though, the company said that revenue would only grow 1% to 3%.

For retirees and other conservative investors, Illinois Tool Works' nearly half-century record of boosting payouts is a definite boon. If you believe that manufacturing will rebound more strongly in the near future, then Illinois Tool Works deserves consideration as part of a retirement play on economic expansion.

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.

Illinois Tool Works is a strong player in its industry, but it could face stronger competition from General Electric in the future. GE management has taken advantage of economic conditions to refocus on its core industrial businesses, and that could be a good reason to buy General Electric even after its recent run. Find out more from our premium report on GE, in which our industrials analyst breaks down the conglomerate's multiple businesses and gives views on whether GE's a buy or a sell. You'll also receive continuing updates as major events unfold during the year. To get started, click here now.

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

The article Will Illinois Tool Works Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and General Electric. Motley Fool newsletter services recommend Ford, General Motors, and Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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