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. As part of an ongoing series, I'm looking today at 10 measures to show whether Kraft Foods makes a great retirement-oriented stock.

Kraft Foods is now a greatly diminished part of its former self, holding the slower-growing North American grocery business after Mondelez took the global snack-food segment in its spinoff. For Kraft, though, competitive pressures still persist as the company refocuses on its well-known grocery brands, including Jell-O, Oscar Mayer, Cool Whip, and its namesake Kraft products. Will the slimmed-down Kraft fare better in the industry? Let's revisit how Kraft Foods 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 Kraft Foods.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$30.4 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

0.06

Pass

 

Worst loss in past five years no greater than 20%

(17.7%)*

Pass

Valuation

Normalized P/E < 18

18.62

Fail

Dividends

Current yield > 2%

3.9%

Pass

 

5-year dividend growth > 10%

NM

NM

 

Streak of dividend increases >= 10 years

NM

NM

 

Payout ratio < 75%

72.7%

Pass

       
 

Total score

 

5 out of 8

Source: S&P Capital IQ. NM = not meaningful because of spinoff. Total score = number of passes.
*Adjusted for spinoff using parent-company numbers where Kraft-specific figures are unavailable.

Since we looked at Kraft Foods last year, the company has lost a point, as revenue dropped slightly. Since its spinoff, though, Kraft's stock has done quite well, rising almost 15% in the past six months.

In its first six months as a separate company, Kraft has worked on trying to make itself a more cost-efficient and productive business. Because of the slow-growing nature of its industry, Kraft is looking for a combination of factors, including higher margins and better returns on invested capital, to bring success rather than just raw revenue growth.

But so far, Kraft hasn't made all the right moves. Last year, the company chose not to respond to price cuts that competitors implemented, and as a result, Kraft lost market share and had to change its marketing strategies going forward. Despite having a strong brand, the experience shows just how critical it is to be competitive on price in a tough economic environment.

The problem Kraft faces is that the food business is dealing with high input costs that are holding back profitability. Rival Unilever saw much faster sales growth than Kraft, but nearly all of its strength came from its personal-care and home-care products, as the food side of its business held Unilever back. Cereal giant General Mills has also had to overcome rising costs for its packaged foods.

For retirees and other conservative investors, it's easy to see Kraft as the safer half of the former consolidated food giant. But at least right now, valuations for Kraft are on the high side, and so despite a promising start, Kraft may be a better candidate for a retirement portfolio if its share price pulls back slightly to give investors better value.

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.

Kraft Foods has entered a new era after its recent corporate break-up. Its brand power is indisputable and its market share dominates, but Kraft's growth potential is limited and its heavily commoditized categories face massive pressures. In The Motley Fool's brand new premium report on the company, we guide you through everything you need to know about Kraft, including the key opportunities and threats facing the company. To get started, simply click here now.

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

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

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends 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.

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