Retirement marks the crowning achievement of a lifetime of hard work and frugal saving. However, it does not mark the end of a marathon, as many believe. It merely marks the beginning of what will hopefully be many more years of prudent investing and financial management.
With this nugget of truth in mind, three of our Foolish contributors submitted their top value-stock picks for retirees. Here's why those with their portfolios in retirement mode should consider adding Verizon Communications (VZ -0.59%), Pfizer (PFE -1.55%), and Kinder Morgan (KMI 0.63%).
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Value in 21st-century communications
Sean O'Reilly (Verizon Communications): Cheap stocks are hard to come by these days, but my pick for this roundtable, Verizon, has a lot to offer the value-conscious. With over a third of the United States cellular market, Verizon is the most prominent wireless provider in America. The company is also a force to be reckoned with in cable, internet, and traditional landline phone services. Though currently a telecommunications provider, Verizon is making inroads into the world of content -- most notably, via its $4.5 billion acquisition of Yahoo!.
Investors should note that profit growth has been lackluster as of late. Earnings per share for the third quarter of 2017 were flat at $0.89. Revenues rose just 2.5.5% year over year, to $31.7 billion for the quarter. In response, management announced a plan to cut $10 billion in costs from operations over the next four years; the initiative will use what has become known as "zero-based budgeting," the operating philosophy made famous by private equity group 3G Capital.
Long-term investors have nothing to worry about.
Cash from operations totaled a whopping $17.2 billion for the first nine months of this year. Capital expenditures amounted to just $11.3 billion, meaning Verizon produced $6 billion in free cash flow to reward shareholders and invest in the future. Verizon's strong portfolio of assets also helped it announce its 11th consecutive annual dividend increase recently. Trading at 13.6 times forward EPS estimates (via S&P Global Market Intelligence), and sporting a dividend yield of nearly 5%, Verizon Communications is a value stock perfect for Foolish retirees.
Growth and income for a low price
Matt DiLallo (Kinder Morgan): Natural-gas pipeline giant Kinder Morgan offers retirees a lot for the price. The company pays an above-average dividend that currently yields 2.6%. Furthermore, it recently announced plans to increase that payout by 60% next year and another 25% in both 2019 and 2020.
Two factors support that growth. First, the company has $12.2 billion of high-return and predominantly fee-based growth projects coming down the pipeline, which should increase earnings by as much as 20% over the next few years. Second, it intends to increase its payout ratio from 25% of cash flow to 50%.
Typically, a company that offers a well-supported income stream with visible upside would sell for at least a market-average multiple. However, that's not the case with Kinder Morgan. At its current stock price, it sells for less than 10 times cash flow, well below the mid-teens average multiple of its peers. That's one reason that the company also plans to buy back up to $2 billion in stock; thanks to its dirt-cheap price, that would enable it to reduce outstanding shares by 5%.
It's not very often that value-conscious retirees have an opportunity to pick up shares of a great company for an excellent price. However, that's just what they have with Kinder Morgan. They don't have to pay much to lock in a decent income stream today and watch it grow at a rapid rate over the next few years.
A big pharma stock that's a longtime favorite for retirees
Keith Speights (Pfizer): Investors have turned to pharmaceutical stocks for their retirement portfolios for a long time. One of the best winners through the years has been Pfizer (PFE -1.55%). I think the big pharma stock is still a good pick for retirees.
A big reason for Pfizer's appeal is its value. Shares currently trade at 13 times expected earnings, well below the average for the S&P 500. Pfizer stock is also more attractively valued than many of its peers in the pharmaceutical industry.
Another great reason for investors to like the stock for retirement accounts: Pfizer's dividend, which yields 3.6% right now -- one of the highest yields in healthcare. And while the drugmaker's payout ratio of 90% is higher than ideal, Pfizer generates a hefty amount of cash flow that should keep the dividends flowing.
The company also should turn in respectable growth over the next few years, particularly considering that some of its legacy drugs' losing exclusivity will serve as a drag. Pfizer has a big winner with Ibrance, which is on track to become one of the world's five top-selling cancer drugs by 2022. The drugmaker also has high hopes for Bavencio and Xtandi, which it picked up with the acquisition last year of Medivation.
Speaking of acquisitions, look for more to come from Pfizer. Although the company has been quiet on the business-development front this year, the potential for corporate tax reform in the U.S. could mean that Pfizer will soon be on the prowl again.
