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Will Bristol-Myers Squibb Help You Retire Rich?

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.

Pharmaceutical stocks are an interesting play right now, as many companies go through patent expirations and try to figure out how to recoup lost sales. Bristol-Myers Squibb (NYSE: BMY  ) has had some recent success in its drug pipeline, although it's come with some controversy over its initially high price. Can the drug company find a way to beat out the heavy competition in the industry? Below, we'll revisit how Bristol-Myers Squibb 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 Bristol-Myers Squibb.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $55 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 5 years Pass
Stock stability Beta < 0.9 0.47 Pass
  Worst loss in past five years no greater than 20% (6.0%) Pass
Valuation Normalized P/E < 18 12.11 Pass
Dividends Current yield > 2% 4.2% Pass
  5-year dividend growth > 10% 3.5% Fail
  Streak of dividend increases >= 10 years 5 years Fail
  Payout ratio < 75% 60.8% Pass
       
  Total score   8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Bristol-Myers Squibb last year, the company has picked up a point. Another year of revenue growth earned Bristol-Myers an eight, but further gains may be a long time coming.

The big threat to Bristol-Myers lies in its dependence on blood thinner Plavix. With a third of Bristol's revenue coming from the drug, the patent's expiration later this year creates a hole in the company's sales picture going forward.

Already, Bristol-Myers has worked hard to try to replace that blockbuster drug. Its Yervoy treatment for melanoma got approved last year and came with a hefty price tag. If its atrial fibrillation drug Eliquis gets approved later this year, then it could benefit greatly from its strong position, alongside development partner Pfizer (NYSE: PFE  ) . An even more aggressive move was to buy out Inhibitex back in January, responding to Gilead Sciences (Nasdaq: GILD  ) and its similar purchase of Pharmasset. Both companies were big players in the hepatitis C area, although Bristol-Myers received some criticism for paying $2.5 billion for an early stage drug.

Bristol-Myers is involved in an interesting situation right now. Reports that the company had made an unsolicited offer to buy biotech Amylin Pharmaceuticals (Nasdaq: AMLN  ) prompted activist investor Carl Icahn to send a letter to Amylin demanding more information. So far, Bristol-Myers hasn't said anything about the reported deal, leaving investors to speculate over rumors.

Retirees and other conservative investors will have to wait and see what impact these acquisitions and new drugs have on the bottom line. If they pan out well, then Bristol-Myers could find itself in a relatively dominant position in the industry compared to peers with weaker pipelines.

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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add Bristol-Myers Squibb to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Gilead Sciences and Pfizer. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

10/24/2014 4:01 PM
BMY $53.63 Up +1.13 +2.15%
Bristol-Myers Squi… CAPS Rating: ****
AMLN.DL $0.00 Down +0.00 +0.00%
Amylin Pharmaceuti… CAPS Rating: **
GILD $110.71 Up +3.53 +3.29%
Gilead Sciences CAPS Rating: *****
PFE $29.11 Up +0.51 +1.78%
Pfizer CAPS Rating: ****

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