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.

Prudential is a giant in the insurance industry, promoting products that promise stability and certain in troubled times. Lately, that kind of comfort has been highly in demand, yet the insurer has still faced a long road back from the financial crisis. What's next for the company that promises you a piece of the rock? Below, we'll revisit how Prudential 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 Prudential.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$26.9 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

4 years

Pass

Stock stability

Beta < 0.9

2.37

Fail

 

Worst loss in past five years no greater than 20%

(66.3%)

Fail

Valuation

Normalized P/E < 18

18.76

Fail

Dividends

Current yield > 2%

2.8%

Pass

 

5-year dividend growth > 10%

8.8%

Fail

 

Streak of dividend increases >= 10 years

4 years

Fail

 

Payout ratio < 75%

52.9%

Pass

       
 

Total score

 

4 out of 10

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

Since we looked at Prudential last year, the company has lost a point, with a big jump in its normalized earnings multiple. Yet that expansion hasn't led to strong shareholder returns, as the stock is almost flat over the past year.

Prudential has had to deal with tough times in the insurance industry. Low interest rates have sapped its ability to earn income on premiums it collects, threatening its long-term profits. Certain business lines have proven not to produce the profits that the company had hoped to see, with Prudential having joined MetLife last year in deciding not to take new applications for long-term care insurance.

But Prudential has done a good job of scoring some lucrative business opportunities in the past year. Both General Motors and Verizon decided to outsource substantial portions of their pension liability to Prudential, turning over billions of dollars in assets in exchange for annuities that will pay workers their pensions throughout the rest of their lives.

Moreover, Prudential is taking advantage of other carriers' decisions to pull back on their business. Prudential ended up buying the individual life insurance business of Hartford Financial as part of Hartford's massive reorganization of its business lines.

For retirees and other conservative investors, Prudential's solid dividend makes it look reasonably attractive. With normalized earnings projected to recover in the coming year, the high valuation may look much more reasonable in the near future, making Prudential worth a closer look for retirement investors willing to invest in the financial industry.

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. 

Will Prudential save GM?
GM's move to outsource its pension liability to Prudential is just one step the automaker has made to try to shore up its finances since emerging from bankruptcy. Find out everything you should know about GM by reading Fool auto expert John Rosevear's premium research report on the company, which will tell you his view on whether GM is a buy after its turnaround. Don't wait to learn more; click here now to get started.

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

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

Fool contributor Dan Caplinger owns warrants on Hartford Financial. The Motley Fool recommends General Motors. 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.


Increase your money and finance knowledge from home

Socially Responsible Investing

Invest in companies with a conscience.

View Course »

Investing in Startups

The lucrative and risky world of startups.

View Course »

Add a Comment

*0 / 3000 Character Maximum