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.

Conservative investors routinely turn to consumer-products stocks as defensive plays on the economy, and Colgate-Palmolive is one of the strongest such companies out there. Yet unusually, the stock has actually gotten huge amounts of investor attention lately, raising the question of whether its high-quality business justifies its current valuation. Let's revisit how Colgate-Palmolive 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 Colgate-Palmolive.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$52.4 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

2 years

Fail

Stock stability

Beta < 0.9

0.44

Pass

 

Worst loss in past five years no greater than 20%

(10.1%)

Pass

Valuation

Normalized P/E < 18

23.08

Fail

Dividends

Current yield > 2%

2.4%

Pass

 

5-year dividend growth > 10%

11.8%

Pass

 

Streak of dividend increases >= 10 years

49 years

Pass

 

Payout ratio < 75%

47.2%

Pass

       
 

Total score

 

8 out of 10

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

Since we looked at Colgate-Palmolive last year, the company has been unable to gain back the point it lost from 2011 to 2012. In fact, the stock's valuation has climbed even higher, with the shares having risen nearly 20% over the past year.

Colgate has become one of the best companies in America by sticking to its devotion to innovation. Even though it's only a fraction the size of its larger rivals, Colgate has held its own in markets throughout the world with its product lineup.

In particular, Colgate has done a good job of catching up with Procter & Gamble , which has left the door open for Colgate to expand broadly in emerging markets. In particular, Latin America has become an increasingly important market for Colgate, and growth there has helped drive impressive results for the company. At the same time, making sure that margins stay wide has given Colgate a competitive advantage over Kimberly-Clark and Unilever in dealing with the raw-materials cost increases that companies throughout the consumer-products industry have had to deal with lately.

In its most recent quarter, Colgate continued to show favorable performance compared with Procter & Gamble and its other peers. Although growth in the Latin American segment slowed somewhat, the company still did well in the key markets of Brazil and Mexico. Weakness in Venezuela, which subsequently devalued its currency and gave Colgate another hit, was responsible for a big part of the company's failing to hit analysts' revenue estimates.

For retirees and conservative investors, nearly half a century of healthy dividend increases is certainly a compelling reason to own Colgate-Palmolive. But even with the growth potential that emerging markets provide the company, it's hard to justify paying such a high earnings multiple for Colgate-Palmolive. If investors grow weary of defensive plays and sell off the stock, then it would make a smarter buy for a retirement portfolio.

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.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names 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 Colgate-Palmolive to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

The article Will Colgate-Palmolive Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark, Procter & Gamble, and Unilever. Try any of our Foolish newsletter services free for 30 days. 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 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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