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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
The sovereign debt crisis in Europe has many investors scared to death of investments in the region. But throughout Europe, global businesses are doing their best to keep operating as normal. One of them is French pharma Sanofi (NYSE: SNY ) , which produces a wide variety of useful drugs. But with Europe in turmoil, will the inevitable fallout have an effect on Sanofi's bottom line? Below, we'll look at how the company does on our 10-point scale.
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 Sanofi.
|
Factor
|
What We Want to See
|
Actual
|
Pass or Fail?
|
| Size |
Market cap > $10 billion |
$93.2 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 |
4 years |
Pass |
| Stock stability |
Beta < 0.9 |
0.36 |
Pass |
|
Worst loss in past five years no greater than 20% |
(27.9%) |
Fail |
| Valuation |
Normalized P/E < 18 |
13.86 |
Pass |
| Dividends |
Current yield > 2% |
4.8% |
Pass |
|
5-year dividend growth > 10% |
10.5% |
Pass |
|
Streak of dividend increases >= 10 years |
12 years |
Pass |
|
Payout ratio < 75% |
70.2% |
Pass |
|
|
|
|
|
Total score |
|
8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
With a score of eight, Sanofi has nearly everything conservative investors want from a stock. But the company still faces the same challenges that most of its pharma peers do, especially on the patent-cliff front.
Over the years, Sanofi has had success in helping create a number of strong-selling drugs. Lovenox and Plavix both thin the blood to reduce risks of clotting, especially among patients with a history of heart attack, while Eloxatin is a treatment for colorectal cancer. A couple years ago, the company also got attention for its H1N1 swine flu vaccine.
But like Merck (NYSE: MRK ) , Pfizer (NYSE: PFE ) , Eli Lilly (NYSE: LLY ) , and a host of other big pharma companies, Sanofi has to deal with its big drugs going off-patent, opening up generic competition from the likes of Teva Pharmaceutical (Nasdaq: TEVA ) and a host of other generic-making peers. Already, Momenta Pharmaceuticals (Nasdaq: MNTA ) makes a generic version of Lovenox; and Plavix, which Sanofi developed along with Bristol-Myers Squibb (NYSE: BMY ) , has its patent expire next year.
The long-term question for retirees and other conservative investors is whether Sanofi will be able to replace its past blockbusters with new, promising treatments. With a high dividend yield and low valuation, it looks like most investors are betting that the answer is no -- but if the company can beat those expectations, the stock could get a huge boost in the long run.
Keep searching
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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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."
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