Friday, February 23, 2024
Stocks To Sell

Retirement Risk: 3 Companies Overloaded With Their Own Stock

In 2020, I discussed how federal pension laws restricted the amount of company stock that could be held within an employee’s defined benefit plan to 10% of the assets. Unfortunately, the same cannot be said about defined contribution plans like 401(k)s, which have created glaringly obvious retirement risk stocks to avoid.  

In 2018, two finance professors contributed an article to Fortune that said 38% of large American companies (5,000 or more employees) made their company stock one of the investment options, while 36% of these companies didn’t restrict the amount an employee could hold in their company’s stock.

That’s a recipe for disaster should the business blow up like Enron did. On Dec. 31, 2000, 62% of the assets in the Enron 401(k) plan were shares of Enron stock. Enron entered bankruptcy proceedings less than a year later, on Dec. 2, 2001. 

One word: Diversification. 

Any company that doesn’t limit company stock, no matter who it is, is asking for trouble. Here are three stocks to avoid because their retirement plans are overloaded with company stock.

Stocks to Avoid: Exxon Mobil (XOM)

In 2020, Exxon Mobil (NYSE:XOM) stock accounted for 43.4% of the Exxon Mobil Savings Plan. Today, the value of XOM stock in the plan as of Dec. 31, 2022, the most recent 11-K filing, says it was $8.39 billion, or 39.8% of the overall investments of $21.1 billion.

While that’s down 360 basis points from three years ago, it’s still about four times too high. Realistically, the federal government should implement a 5% limit on defined contribution plans. That’s especially true for cyclical businesses such as those in the oil and gas industry. 

The company might argue that because the plan limits an employee’s annual contribution to 20% of their eligible pay, the other 80% goes elsewhere, including a portion, quite possibly, into IRAs and Roth IRAs.

Fair enough. 

But given what happened in the Enron situation, it would be better to err on the side of caution.  

How bad has XOM been as a long-term investment? 

Since the turn of the century, XOM stock has had a CAGR of 3.8% over the past 23 years. That’s nothing to write home about, making it one of the stocks to avoid.

Albemarle (ALB)      

Albermarle (NYSE:ALB) stock accounted for 20.4% of the Albemarle Corporation Retirement Savings Plan. The value of the plan at the end of December 2022 was $852.9 million, down from $1.03 billion a year earlier. 

That’s not nearly as high as Exxon Mobil’s, but Albermarle isn’t in the same league as the world’s second-largest oil and gas company. 

If you’re unfamiliar with Albemarle, it’s become popular with investors recently because of its lithium production, a main ingredient in electric vehicle (EV) batteries. With investors shying away from EV stocks in recent months, stocks like Albemarle have been hit by the dampened enthusiasm for EVs. 

On Jan. 29, TD Cowen downgraded ALB stock to Market Perform from Outperform. It cut the target price by $90 to $130. Lower lithium prices are the cause of the downgrade.  

Based on the $90 drop and 800,607 shares outstanding at the end of 2022, that would erase $72 million in value from the plan’s Albemarle holdings. The shares were valued at $216.86 at the end of 2022. By merely transferring half of the $173 million in stock to an S&P 500 index fund, employees would be well ahead of where they will be at the end of 2023 due to the Albemarle concentration. 

Darden Restaurants (DRI)

Darden Restaurants (NYSE:DRI) is another name that appeared on my 2020 list. DRI stock accounted for 32.5% of the $939.5 million total investments in the Darden Savings Plan as of April 30, 2019. As of April 23, 2023, the percentage had fallen to 27.7%, but still way too high for proper capital allocation.

Darden stock has done okay over the past four years. From its April 30, 2019, close to its April 23, 2023 close, it’s up 29%. The S&P 500 over the same period is up 41%, 1,200 basis points higher.

If you look at the investments held in its savings plan, the largest allocation, besides its stock, is $141.2 million (12% of the $1.18 billion in total). It’s invested in the Vanguard Institutional Index Fund (MUTF:VINIX), which tracks the performance of the S&P 500. That percentage should be higher. 

Ultimately, the employees are responsible for choosing their investments within their 401(k). However, like the oil and gas industry, the restaurant business is anything but stable. Darden should be limiting the stock ownership in the plan. At the very least, close the plan to new stock purchases until the percentage decreases. 

I would say the same about a company whose stock was on fire for the past four years. If you took this allocation to a certified financial planner, I’m pretty confident they wouldn’t be okay with it, no matter the client’s financial situation.

It’s too much.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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