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.

Millions of Americans wake up to coffee every day, and lately, more coffee-drinkers get their fix from Green Mountain Coffee Roasters . The company's Keurig home brewing systems have been a hit for years. But with the initial version of the product coming off patent and rivals entering the K-Cup space, can Green Mountain stay on top? Below, we'll revisit how Green Mountain Coffee Roasters 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 Green Mountain Coffee Roasters.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$6.1 billion

Fail

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

2 years

Fail

Stock stability

Beta < 0.9

0.98

Fail

 

Worst loss in past five years no greater than 20%

(7.8%)

Pass

Valuation

Normalized P/E < 18

19.19

Fail

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

 

Streak of dividend increases >= 10 years

NM

NM

 

Payout ratio < 75%

NM

NM

       
 

Total score

 

2 out of 8

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

Since we looked at Green Mountain Coffee Roasters last year, the company's score has dropped by a point, with a rising beta pulling it down. The stock has also suffered, falling almost 10% over the past year.

Green Mountain has dominated the home-brewing coffee market with its Keurig machines. With patented designs, the company got many major coffee companies, including Starbucks , to make licensing deals to provide K-Cups for Green Mountain's Keurigs.

Yet Green Mountain had to deal with new competitive challenges recently. With K-Cups going off patent, a flood of new sellers have started marketing their own single-serve coffee. Although those deals won't hurt Green Mountain's machine sales, they won't give the company the licensing revenue it used to get. Moreover, Starbucks went up against the Keurig with its Verismo brewing machine over the holiday season, with strong reported demand for both machines.

Some big changes in the company's leadership point to interesting times ahead for Green Mountain. With CEO Brian Kelley coming over in November from Coca-Cola to provide a new perspective on the beverage business, and with new board members from Fortune Brands and Kellogg , Green Mountain is diversifying its leadership expertise to give it broader perspectives on its customer base and how best to tap it.

For retirees and other conservative investors, one concern has to be whether Green Mountain ends up overpaying for an acquisition. With a private equity company taking out Caribou Coffee last month at a roughly 30% premium, and Peet's Coffee & Tea having sold itself earlier last year for a similar markup, other small industry players trade at premium prices. With no dividend, Green Mountain has to serve up strong growth to justify a place in retirement investors' 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. 

You can find out more about Green Mountain in our premium research report on the stock. Inside, you'll get in-depth analysis of whether Green Mountain is a buy, along with the challenges and opportunities facing the company. Click here for instant access.

Add Green Mountain Coffee Roasters to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

The article Will Green Mountain Coffee Roasters 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 and has options positions on Starbucks. Motley Fool newsletter services recommend Green Mountain, Coca-Cola, and Starbucks. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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Voiper

Are you joking?
Have you looked at why GMCR dropped over 60% in the last 2 years? From 107.99 on 9/16/2011 to 41.23 on 1/13/2012. I'd want to check that out before investing with a company.

January 12 2013 at 5:59 PM Report abuse rate up rate down Reply