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Will Bank of New York Mellon Help You Retire Rich?

Monday - 12/31/2012, 2:00am  ET

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.

Despite its name, Bank of New York Mellon isn't your typical Wall Street bank. Rather than trying to make money on deposits and loans, BNY Mellon is a giant in providing financial services largely to institutional investors, including custodial services to for-profit business entities as well as foundations, endowments, and public retirement funds. It also manages assets, offering mutual funds to individuals and institutions as well as high-end wealth management for high-net-worth families. Below, we'll revisit how Bank of New York Mellon 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 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 Bank of New York Mellon.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$29.7 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

0.89

Pass

 

Worst loss in past five years no greater than 20%

(40.4%)

Fail

Valuation

Normalized P/E < 18

13.61

Pass

Dividends

Current yield > 2%

2%

Pass

 

5-year dividend growth > 10%

(11.1%)

Fail

 

Streak of dividend increases >= 10 years

0 years

Fail

 

Payout ratio < 75%

27.3%

Pass

       
 

Total score

 

5 out of 10

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

Since we looked at Bank of New York Mellon last year, the company's score has dropped by a point, with falling revenue proving the culprit. But the stock has done quite well in a favorable climate for financial stocks overall, as shares have risen 25% over the past year.

Despite BNY Mellon's strong returns in 2012, comparing the bank with Citigroup or Bank of America will give you the sense that BNY Mellon is lagging behind its peers. Yet when you pull back and take a five-year view of the stocks, it's easy to see that BNY Mellon didn't fall nearly as far as its fellow banks, since it didn't have the huge mortgage businesses that caused so much trouble for Citi and B of A.

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