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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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
Novo Nordisk (NYSE: NVO ) doesn't quite have the household name recognition that many of its U.S. competitors have. But Novo is a big player in the insulin market to treat diabetes, and the company's diabetes drug Victoza has been a big seller, helping to drive the company's growth in recent years. Can Novo Nordisk keep up the pace, or will it suffer from the same pressures that many other pharma stocks are dealing with right now? Below, we'll revisit how Novo Nordisk 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 Novo Nordisk.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$78.4 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||5 years||Pass|
|Stock stability||Beta < 0.9||0.10||Pass|
|Worst loss in past five years no greater than 20%||(21.4%)||Fail|
|Valuation||Normalized P/E < 18||34.45||Fail|
|Dividends||Current yield > 2%||1.7%||Fail|
|5-year dividend growth > 10%||32%||Pass|
|Streak of dividend increases >= 10 years||12 years||Pass|
|Payout ratio < 75%||43.8%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Novo Nordisk last year, the company has kept its seven-point score. But even as the world's largest insulin maker commands a strong market, its shares trade at an unusually high multiple -- and it's involved in a race to come out with an obesity treatment.
Compared to many other pharma companies, Novo is in an enviable position. Both Pfizer (NYSE: PFE ) and Merck are facing major issues with patent expirations, but Novo doesn't have to deal much with imminent generic competition. Victoza was approved only a short time ago, and although Eli Lilly (NYSE: LLY ) and Sanofi share the insulin market for patients with diabetes, insulin has given Novo a great deal of stability in its financials.
Novo has an even bigger opportunity, though. Although Victoza has been effective in cutting blood sugar, it also resulted in substantial weight loss for patients who took it. That puts it directly up against Vivus (Nasdaq: VVUS ) , which hopes to get approval for its Qnexa drug from the FDA by July, as well as competitors Orexigen and Arena Pharmaceuticals (Nasdaq: ARNA ) , both of which have rival drugs. With over a decade having passed without an approved obesity drug, the potential market for Victoza is huge.
Last week, Novo released what appeared to be a favorable earnings report, with revenue rising 13% and net income jumping 15% based largely on strength in its core insulin segment. But even projecting 2012 revenue growth of 8% to 11% and a double-digit percentage rise in operating profit for the coming year, investors were disappointed and bid the shares down.
Still, for retirees and other conservative investors, Novo has done a good job of getting its dividend yield up to a somewhat respectable level. Continued growth will be the stock's best chance to boost its score in the coming year, but until the earnings multiple comes down, retirement investors should probably be patient and stay on the sidelines to wait for a more attractive entry point.
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.
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