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 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
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
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.
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