Legendary investor Warren Buffett likes to buy great businesses at fair prices. Sometimes, that means keeping an eye on a fantastic company until its shares are available at a reasonable price.
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We asked a panel of our top investors to share some tickers that retirees might want to keep on their watchlists for a pricing pullback. These are great stocks for any retirement portfolio, just not at today's overheated prices.
Read on to see why they recommended holding your horses until fast-food legend McDonald's (NYSE: MCD), Canadian energy pipeline titan TransCanada (NYSE: TRP), and healthcare-oriented real estate investor HCP (NYSE: HCP) take a break from their recent gains.
Any sell-off would be a gift
Matt DiLallo (TransCanada): Canadian energy infrastructure giant TransCanada has done an excellent job over the past two years of transforming its business into a low-risk, high-growth dividend stock. It has done this in two ways. First, it has jettisoned some of its higher-risk assets that generated less predictable cash flow streams and used those proceeds to support its growth initiatives. Meanwhile, it has invested capital to build and buy lower-risk assets that produce contractually secured cash flow. As a result, the company has reduced its earnings volatility so that 95% of comes from regulated or contractually secured assets, up from 90% when it started this process.
The early results of this transformation have been quite impressive. For example, during the second quarter, TransCanada's distributable cash flow shot up 33.3% on an absolute basis and 8% per share as a result of the acquisition of Columbia Pipeline Group and new fee-based growth projects that have entered service.
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That said, the company is just getting started since it has 24 billion Canadian dollars' ($19.3 billion) worth of near-term growth projects underway. Due to the contractually secured cash flow backing this backlog, it should support a compound annual dividend growth rate of 8% to 10% through 2020, which is an acceleration of its prior 7% compound annual growth rate.
Given TransCanada's rapid progress on its growth strategy, it's no surprise to see that its stock has risen more than 9% since the start of the year, which has pushed the dividend yield down to 3.6% despite a healthy 10.6% boost earlier this year. That's why any pullback would be a great opportunity for income-seeking retirees to scoop up shares of this top-notch pipeline company.
This inelastic business is the perfect place for retirees to invest their money
Sean Williams (HCP): Stock market pullbacks are inevitable, even if it might seem as if the bull market rally could extend forever at this point. When stocks do eventually pull back, I'd suggest retirees seek shelter in specialty real estate investment trust (REIT) HCP.
HCP is a REIT with a specific focus on healthcare buildings, such as life science buildings that drugmakers use for research and development, senior housing facilities, and medical offices. It then leases these buildings for extended periods of time and ensures that it can pass along rental increases that meet or beat the inflation rate. HCP can also dispose of medical buildings after some time (years or decades) for a profit to perpetuate its acquisition and leasing cycle. Since medical care is an inelastic business (i.e., people are always getting sick, regardless of the health of the U.S. economy), HCP could be a smart stock to consider during a stock market swoon.
HCP also stands to benefit from the growing number of elderly persons in the United States. According to the U.S. Census Bureau, the elderly population is expected to nearly double from 48 million to 88 million between 2015 and 2050. Elderly folks usually require more medical care than younger adults, meaning demand for senior housing facilities, drug research, and medical office buildings would be expected to rise as time passes. That should mean more lease pricing power for HCP.
It's a considerably leaner company, too. Last year's spinoff of HCR ManorCare, and the sale of 64 triple-net assets leased to Brookdale Senior Living this past March, boosted its liquidity, improved its focus on its remaining businesses, and allowed it to extend the maturities on its remaining debt.
As icing on the cake, the company's 5% dividend yield is light-years ahead of the average yield of the S&P 500. If the stock market pulls back, HCP is a stock that should be seriously considered.
These burgers are looking fresh again -- maybe even a little too fresh
Anders Bylund (McDonald's): Good old Mickey D's stock trailed far behind the broader market between 2012 and 2015. The "better burger" trend brought lots of new competition to the table, and the business recipes that had served McDonald's and its investors so well for decades were in dire need of new thinking.
A brand-new management team did exactly that in 2015, led by former chief brand officer Steve Easterbrook in the CEO chair. The company went back to Food Service Basics 101, refocused on convenience and value, and reshaped the aging menu. Serving breakfast items all day was a particularly popular move, followed by some higher-quality basic burgers and preservative-free McNuggets.
The business improvement efforts are literally paying dividends.
In the last two years, McDonald's has widened its operating margins from 27.4% to 34.7%, increased EBITDA profits by 9%, and started reporting rising comparable-store sales on a regular basis. The golden arches represent a healthy and growing enterprise again, not a fading former consumer staple.
Investors caught on quickly, and McDonald's shares have gained a market-beating 32% in the last 52 weeks. The stock is trading at more than 25 times trailing earnings today, and the rapidly rising share prices have put a ceiling on the dividend yield.
You could certainly buy McDonald's stock today and enjoy a steadily rising dividend payout with full backing from torrential free cash flows. But besides the inflated P/E ratio, you'd also lock in the lowest dividend yields McDonald's has seen since 2007.
So I would suggest just keeping an eye on McDonald's until the market has another mood swing. The fundamental business is solid but stocks often drop for no obvious reasons. In this case, I wouldn't be surprised to see some investors cashing in their profits on the recent run-up in McDonald's share prices, leaving room for opportunistic investors to build positions at a lower cost and with higher effective dividend yields.
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Anders Bylund has no position in any stocks mentioned. Matt DiLallo has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.