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.
What We Want to See
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.
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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