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. The food industry used to be a stable, boring business, with staples like cereal generally providing predictable but unexcitingly slow growth. Lately, though, food giant Kellogg (NYSE: K) has found itself in the middle of some lucrative controversies that have been anything but boring. Having won a key battle, can the cereal giant broaden its scope to become a true leader throughout the food business? Below, we’ll revisit how Kellogg does on our 10-point scale. The right stocks for…
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.
The food industry used to be a stable, boring business, with staples like cereal generally providing predictable but unexcitingly slow growth. Lately, though, food giant Kellogg (NYSE: K) has found itself in the middle of some lucrative controversies that have been anything but boring. Having won a key battle, can the cereal giant broaden its scope to become a true leader throughout the food business? Below, we’ll revisit how Kellogg 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 scrutinising 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 normalised 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 jeopardise the company’s financial health.
With those factors in mind, let’s take a closer look at Kellogg.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$17.6 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.45||Pass|
|Worst loss in past five years no greater than 20%||(14.1%)||Pass|
|Valuation||Normalized P/E < 18||16.10||Pass|
|Dividends||Current yield > 2%||3.5%||Pass|
|5-year dividend growth > 10%||8.1%||Fail|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||49.8%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Kellogg last year, the company has picked up a point, with its valuation falling slightly. Yet even though the stock has fallen 10%, Kellogg has an interesting opportunity that could prove to be a long-term winner.
Kellogg has long been a big name in the breakfast-food area. With its many popular cereals, the company goes head-to-head against rival General Mills (NYSE: GIS) in the battle for breakfast supremacy.
Yet a big problem for Kellogg has been that other segments of the food industry have been more lucrative. Kraft Foods (NYSE: KFT), for instance, has its line of snack foods to provide faster growth than its more dependable grocery items. The snack business has huge promise, and Kraft decided to split off its global snacks division in order to help it reach its full potential.
That’s why Kellogg investors should be ecstatic that the company was able to swoop in and buy the Pringles division from Procter & Gamble (NYSE: PG) after Diamond Foods (Nasdaq: DMND) was unable to close its earlier deal with P&G. The move will turn Kellogg into a big player in the global snacks market, tripling the division’s size.
For retirees and other conservative investors, Kellogg’s lengthening track record of higher dividends is a good sign of its confidence in its future. The current yield is rich enough to make shareholders happy as well. Kellogg definitely deserves a close look from retirement investors as a candidate for a conservative investment portfolio.
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The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by Dan Caplinger, originally appeared on fool.com