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.
You won’t see SYSCO Corporation (NYSE:SYY)‘s name on restaurant menus or ballpark concession stand billboards. But as the largest food-services and distribution company in the country, Sysco is responsible for delivering much of the you eat away from home. But can the company maintain its impressive leadership in the industry? Let’s revisit how Sysco 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 Sysco.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $19.2 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 | 0.69 | Pass |
| Worst loss in past five years no greater than 20% | (23.5%) | Fail | |
| Valuation | Normalized P/E < 18 | 15.33 | Pass |
| Dividends | Current yield > 2% | 3.4% | Pass |
| 5-year dividend growth > 10% | 6.6% | Fail | |
| Streak of dividend increases >= 10 years | 43 years | Pass | |
| Payout ratio < 75% | 58.7% | Pass | |
| Total score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Sysco last year, the company hasn’t been able to earn back the point it lost from 2011 to 2012. But the shares haven’t done badly, rising about 10% over the past year.
Sysco has a nationwide network of distribution centers from which it serves more than 400,000 restaurants, hotels, schools, and other institutional food vendors. That has forced most of its competitors to look for small niches in order to find success. For instance, United Natural Foods, Inc. (NASDAQ:UNFI) specializes in the lucrative natural and organic food segment, where its customers appreciate its focus on the brand names they rely on to keep their shoppers and patrons happy. Similarly, Core-Mark Holding Company, Inc. (NASDAQ:CORE) serves gas-station convenience stores, with their customers wanting snacks and other fast ready-serve food options. Both Core-Mark and United have had substantial share-price gains over the past year, but they don’t really pose a challenge to Sysco’s core business.
Yet with its reliance on the restaurant industry, weakness in restaurant-chain growth can have an impact. Several high-growth eateries have seen slowdowns lately, and higher costs from food inflation could affect demand even further. Sysco has enough pricing power to pass through food costs to customers, but that doesn’t mean customers can always afford price increases.
For retirees and other conservative investors, Sysco’s long streak of dividend increases gives shareholders solid, dependable income at a reasonable valuation. The stock will probably never provide explosive upside potential, but as a steady part of a retirement portfolio, Sysco has attractive attributes.
The article Will Sysco Help You Retire Rich? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Sysco.
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