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.
Many investors think of PepsiCo, Inc. (NYSE:PEP) simply as the also-ran in the cola wars. But even though its identity focuses on its namesake beverage, PepsiCo has huge strength in its snack business, where it dominates the competition with a highly efficient worldwide distribution network. Can PepsiCo finally rise above its cola rival to demonstrate its advantages? Let’s revisit how PepsiCo 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 PepsiCo, Inc. (NYSE:PEP).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $117 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 | 5 years | Pass | |
| Stock stability | Beta < 0.9 | 0.47 | Pass |
| Worst loss in past five years no greater than 20% | (26%) | Fail | |
| Valuation | Normalized P/E < 18 | 22.42 | Fail |
| Dividends | Current yield > 2% | 2.8% | Pass |
| 5-year dividend growth > 10% | 8.3% | Fail | |
| Streak of dividend increases >= 10 years | 41 years | Pass | |
| Payout ratio < 75% | 53.5% | Pass | |
| Total score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at PepsiCo, Inc. (NYSE:PEP) last year, the company has fallen by three full points, as a decline in revenue, higher valuations, and a slowdown in dividend growth cost the company on the score front. But the stock has done quite well, rising about 20% over the past year.
Despite the constant comparisons to Coca-Cola (NYSE:KO) , PepsiCo has staked out a different core business model, with big success. Rather than simply relying on beverages as Coke does, PepsiCo’s entire aim is to capitalize on the fact that consumers tend to buy snacks and drinks together. By offering both, PepsiCo, Inc. (NYSE:PEP) maximizes its revenue, while Coke leaves the potential snack sales on the table — often for Pepsi’s Frito-Lay to grab.
But lately, Pepsi has had to deal with the threat of rising anti-obesity sentiment. Soda sales have declined in the U.S., in part because of concerns about sugar and calorie content, and even as Pepsi has shifted toward alternate beverages, the impact on the company’s growth has been considerable. Even emerging-market sales haven’t been able to soften the blow entirely for Pepsi, as Coke has fought it around the world in search of higher-growth areas.
So far, though, Pepsi has resisted pressure to break itself into two separate companies. Despite the recent move from Kraft Foods (NASDAQ:KRFT) to free its Mondelez (NASDAQ:MDLZ) snack business, Pepsi’s unified approach to snack and beverage sales arguably requires a close relationship in order for it to work.
For retirees and other conservative investors, the fact that PepsiCo’s dividend growth has slowed recently even as its shares have gotten more expensive isn’t the best of news. Even with more than 40 years of rising dividend payouts, PepsiCo would be a better buy for a retirement portfolio at a slightly cheaper price — especially as it continues to work through the challenges of the current economic environment.
The article Will PepsiCo Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo and owns shares of PepsiCo.
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