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.
3M Co (NYSE:MMM) is widely misunderstood by casual investors who focus solely on its popular consumer products. But 3M Co (NYSE:MMM) didn’t earn its place within the Dow Jones Industrial Average 2 Minute (Dow Jones Indices:.DJI) based on Post-it Notes; the company’s roots as Minnesota Mining and Manufacturing reflect a much broader array of businesses ranging from medical supplies to lighting products and touch screens. Below, we’ll revisit how 3M does on our 10-point scale.
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 3M Co (NYSE:MMM).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $73 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 | 3 years | Fail | |
| Stock stability | Beta < 0.9 | 0.89 | Pass |
| Worst loss in past five years no greater than 20% | (29.8%) | Fail | |
| Valuation | Normalized P/E < 18 | 19.07 | Fail |
| Dividends | Current yield > 2% | 2.4% | Pass |
| Five-year dividend growth > 10% | 4.2% | Fail | |
| Streak of dividend increases >= 10 years | 55 years | Pass | |
| Payout ratio < 75% | 36.8% | Pass | |
| Total score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at 3M last year, the company has seen its score drop by two points as valuations increased and free cash flow fell over the past year. But the stock has done well, climbing more than 20% since we looked at the company this time last year.
