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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 Johnson & Johnson (NYSE: JNJ ) 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 Johnson & Johnson.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$163 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||0.58||Pass|
|Worst loss in past five years no greater than 20%||(7.7%)||Pass|
|Valuation||Normalized P/E < 18||16.64||Pass|
|Dividends||Current yield > 2%||3.6%||Pass|
|5-year dividend growth > 10%||10.6%||Pass|
|Streak of dividend increases >= 10 years||48 years||Pass|
|Payout ratio < 75%||43.5%||Pass|
|Total score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 8, Johnson & Johnson has most of what retirees and other conservative investors want from a stock. The company has run into some growth hiccups in recent years, but that may simply give investors an opportunity to buy the stock at discounted prices.
Many see Johnson & Johnson as the all-purpose health-care stock , combining three very different yet powerful businesses. The company's consumer brands are well-known and include such names as Band-Aid, Tylenol, and Neutrogena. But consumer brands are actually J&J's smallest segment; its medical device and pharmaceutical divisions both produce considerably more revenue.
Over the past year or so, though, Johnson & Johnson has faced a seemingly never-ending string of recalls. Those recalls cost the company $900 million in lost sales last year, and more importantly, it will likely take a big campaign to lure fleeing customers back from competitors Procter & Gamble (NYSE: PG ) and Kimberly Clark (NYSE: KMB ) and make them comfortable with Johnson & Johnson's products again.
In addition, times have been tough in the medical-device market. Competitors Medtronic (NYSE: MDT ) and Intuitive Surgical (Nasdaq: ISRG ) joined J&J in reporting weak sales in the segment, with the struggling economy to blame for patients' reluctance to have elective medical procedures done. But here too, J&J's Depuy Unit recalled some of its hip replacements, potentially giving doctors second thoughts about their quality going forward.
J&J has bounced back from tough times before, though. Its recovery from its 1982 Tylenol scare is legendary, and there's no reason to believe that the company can't duplicate its success this time around. As long as the company rededicates itself to quality control, Johnson & Johnson should continue to be a good stock for retirees and others seeking dependable dividend income and stable share prices.
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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