Will International Business Machines Corp. (IBM) Help You Retire Rich?

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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.

The Top 4 Tech Stocks to Own in 2013International Business Machines Corp. (NYSE:IBM) may be the company that invented the PC, but the tech giant has moved well beyond its roots to become an information technology powerhouse, with expertise extending well beyond hardware. But given the stiff competition across the space, can the most influential member of the Dow Jones Industrial Average stay ahead of the crowd? Below, we’ll revisit how IBM 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:

1). 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.

2). 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.

3). 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.

4). 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.

5). 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 IBM.

Factor What We Want to See Actual Pass or Fail?
Size Market cap > $10 billion $228 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 3 years Fail
Stock stability Beta < 0.9 0.68 Pass
Worst loss in past five years no greater than 20% (20.8%) Fail
Valuation Normalized P/E < 18 17.02 Pass
Dividends Current yield > 2% 1.7% Fail
5-year dividend growth > 10% 17.1% Pass
Streak of dividend increases >= 10 years 17 years Pass
Payout ratio < 75% 22.9% Pass
Total score 6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at IBM last year, the company has dropped two points, having seen revenue and free cash flow drop over the past year. The stock has also been stuck in the doldrums, rising by less than 5% over the past year.

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