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.
Metlife Inc (NYSE:MET) is one of the best-known insurance companies in the industry, serving customers with a variety of different types of policies. But the company suffered greatly during the financial crisis, as low returns on its investment portfolio and liabilities from its policy provisions protecting customers from principal loss left it struggling. Has MetLife made it back? Below, we’ll revisit how MetLife 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 Metlife Inc (NYSE:MET).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $43.7 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 | 2.00 | Fail |
| Worst loss in past five years no greater than 20% | (42.2%) | Fail | |
| Valuation | Normalized P/E < 18 | 18.50 | Fail |
| Dividends | Current yield > 2% | 1.9% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Streak of dividend increases >= 10 years | 0 years | Fail | |
| Payout ratio < 75% | 70.5% | Pass | |
| Total score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at MetLife last year, the company’s score has dropped by two points, with falling revenue and a big jump in its earnings multiple bringing about the loss. The stock has posted a modest gain, however, rising about 10% over the past year.
Conditions in the insurance industry have been extremely difficult for years. A combination of poor investment returns and big natural disasters has hit the property and casualty segment, while falling bond yields have especially hurt life insurance companies. That has forced many companies to make big adjustments to their coverage, with Hartford Financial Services Group Inc (NYSE:HIG) moving out of the individual life insurance business to focus on property and casualty and with MetLife having chosen to stop selling new long-term care policies.
But recently, things have started turning around for MetLife. After dropping for decades, interest rates have finally started to move higher, and getting higher yields for bonds will help not just Metlife Inc (NYSE:MET) but also peers Manulife Financial Corporation (USA) (NYSE:MFC) and Prudential Financial Inc (NYSE:PRU) . Moreover, both MetLife and Prudential have substantial exposure to the Japanese economy, and with Japan’s central bank poised to join the rest of the world in aggressively fighting deflation by using monetary easing, both companies could see improving conditions there.
In its most recent quarter, MetLife got permission from the FDIC and the Fed to stop being treated as a bank-holding company, since it sold its banking assets to General Electric Company (NYSE:GE) . The move will leave MetLife subject to regulation as a regular insurance company, which is less involved than the regulations that banks have to meet.
For retirees and conservative investors, MetLife’s failure to grow its dividend and its extreme volatility leaves it lacking the best attributes for a retirement stock. Although Metlife Inc (NYSE:MET) has made a lot of progress since 2008, it still hasn’t demonstrated that it belongs in retirement portfolios.
The article Will MetLife Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns warrants on Hartford Financial Services (NYSE:HIG). The Motley Fool owns shares of General Electric.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
