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. Let's figure out what makes a great retirement-oriented stock, then examine whether Abbott Labs (NYSE: ABT ) has what we're looking for.
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 Abbott Labs.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$75.1 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.29||Pass|
|Worst loss in past five years no greater than 20%||(8.3%)||Pass|
|Valuation||Normalized P/E < 18||18.28||Fail|
|Dividends||Current yield > 2%||3.9%||Pass|
|5-year dividend growth > 10%||9.9%||Fail|
|Streak of dividend increases >= 10 years||39 years||Pass|
|Payout ratio < 75%||57.7%||Pass|
|Total score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Abbott puts in a stellar performance on our 10-point scale, collecting eight points and missing only by the smallest of margins on the other two. The drugmaker faces many of the same challenges as its peers, but so far, Abbott has been up to the task.
As the measures above show, Abbott has been among the top stocks as far as consistent, stable returns. With only minimal losses during 2008's market meltdown, the company compares favorably to Merck (NYSE: MRK ) and Eli Lilly (NYSE: LLY ) , which saw much larger drops three years ago.
Recently, Abbott has seen respectable growth, especially from top-selling drugs like Humira, which treats conditions including rheumatoid arthritis and Crohn's disease. But just as Pfizer (NYSE: PFE ) relies heavily on Lipitor, whose patents will soon expire , Abbott's lack of a strong pipeline raises the question of whether the company can continue to grow at roughly a 10% annual pace.
Perhaps the best thing going for Abbott is its relative obscurity. It's much less of a household name than Pfizer or Johnson & Johnson (NYSE: JNJ ) , based on interest from our new watchlist service. Abbott's no unknown by any means, but staying out of the full glare of the spotlight while giving good results year in and year out is exactly what conservative investors like retirees like to see from the solid and stable stocks in their portfolios.
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.
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