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.
Las Vegas has been suffering throughout the recession, but the global economy has changed the gaming industry forever. With huge success in the Asian gambling boomtown of Macau, Wynn Resorts (Nasdaq: WYNN ) has weathered the domestic storm quite well. What's next on the agenda for Wynn? Below, we'll look at how the company 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 in vestments 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 Wynn Resorts.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $16.4 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 | 4 years | Pass |
| Stock stability | Beta < 0.9 | 2.45 | Fail |
| ? | Worst loss in past five years no greater than 20% | (62.3%) | Fail! |
| Valuation | Normalized P/E < 18 | 33.87 | Fail |
| Dividends | Current yield > 2% | 1.5% | Fail |
| ? | 5-year dividend growth > 10% | NM | NM |
| ? | Streak of dividend increases >= 10 years | 1 year | Fail |
| ? | Payout ratio < 75% | 46.7% | Pass |
| ? | ? | ? | ? |
| ? | Total score | ? | 4 out of 9 |
Source: S&P Capital IQ. NM = not meaningful; Wynn Resorts just started paying a regular dividend in May 2010. Total score = number of passes.
With only four points, Wynn Resorts looks like a big gamble for conservative investors who are used to seeing more stability and better dividends from the stocks they own. Yet despite the stock's volatility, Wynn has shown a propensity for managing shareholder capital well.
Wynn Resorts CEO Steve Wynn has been an innovator on the gaming scene for decades. Wynn's Mirage casino reinvigorated Las Vegas in the late 1980s, and along with Treasure Island and Bellagio, Mirage Resorts became a powerful force in the city before MGM Resorts (NYSE: MGM ) bought it in 2000. After the merger, Steve Wynn quickly moved on to form a new business, bringing Wynn Resorts public in 2002.
Since then, Wynn has moved strongly to capitalize on prevailing trends. Along wit! h
For retirees and other conservative investors, betting on the house may seem like a sure thing. But as the stock's performance over the past years has shown, Wynn is a volatile stock. But the company has made smart moves to enhance shareholder value over the years, including well-timed buybacks and several special dividends. Although its regular dividend is nothing to write home about, it shows that Wynn is serious about treating its investors well -- and that's why more risk-tolerant investors could consider giving Wynn a place in their retirement portfolios.
Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.
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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."
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