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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 AstraZeneca (NYSE: AZN ) 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 AstraZeneca.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$63.6 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.25||Pass|
|Worst loss in past five years no greater than 20%||(17.4%)||Pass|
|Valuation||Normalized P/E < 18||7.73||Pass|
|Dividends||Current yield > 2%||5.6%||Pass|
|5-year dividend growth > 10%||14.4%||Pass|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||41.7%||Pass|
|Total score||8 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
AstraZeneca scores a very strong eight points. Although the company falls just short on free cash flow growth and has a couple years to go to reach the decade mark on its dividend-raising streak, the company gives conservative investors most of what they're looking for from a stock.
Like many of its peers, AstraZeneca seems to have many investors worried. Just as Pfizer (NYSE: PFE ) faces the coming patent expiration of its blockbuster drug Lipitor, along with GlaxoSmithKline's (NYSE: GSK ) Advair and Sanofi-Aventis (NYSE: SNY ) and Bristol-Myers Squibb's (NYSE: BMY ) Plavix, AstraZeneca has its top-selling antipsychotic Seroquel coming off patent in September.
Looming competition from Teva Pharmaceutical (Nasdaq: TEVA ) and other players in the generic market will force AstraZeneca to come up with new drugs to replace its highest sellers. Yet the company doesn't have the pipeline you'd like to see from a major pharmaceutical player. And unfortunately, AstraZeneca seems more concerned about keeping shareholders happy through stock buybacks than in aggressively pursuing mergers that could bolster its drug development.
AstraZeneca has the strong track record of dividends that retirees and other conservative investors seek. If you add AstraZeneca to your portfolio, though, be prepared for a rocky road if the company can't deliver on new drugs soon.
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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