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.
When it comes to conservative stocks that retirees tend to prefer, biotech companies don't immediately jump to the front of your mind. But big biotech leader Amgen (Nasdaq: AMGN ) was one of the pioneers of the industry, and as a result, it actually has a relatively mature business with stable cash flow and even a healthy dividend yield. Still, competition is fierce in the industry, especially as traditional pharma stocks face big patent cliffs that have left them scrambling for new drug prospects. Can Amgen make the most of the situation? Below, we'll revisit how Amgen 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 Amgen.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$53.7 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||2 years||Fail|
|Stock stability||Beta < 0.9||0.44||Pass|
|Worst loss in past five years no greater than 20%||(32.0%)||Fail|
|Valuation||Normalized P/E < 18||19.67||Fail|
|Dividends||Current yield > 2%||2.1%||Pass|
|5-year dividend growth > 10%||NM||NM|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||17.1%||Pass|
|Total score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Amgen paid its first dividend in February 2012. Total score = number of passes.
Since we looked at Amgen last year, the company has picked up a point. The new dividend gave Amgen's score its boost, but investors are just as happy about gains of nearly 20% for the stock in the past year.
Amgen finds itself in a cutthroat environment right now. For instance, in psoriasis treatment, its brodalumab is going head-to-head against Eli Lilly's (NYSE: LLY ) ixekizumab, and Amgen's also going up against Regeneron Pharmaceuticals (Nasdaq: REGN ) with a potential cholesterol treatment.
One area where Amgen is fighting hard is in biosimilars, the biotech equivalent of generics. Teva Pharmaceutical (Nasdaq: TEVA ) and Novartis (NYSE: NVS ) have an obvious edge due to their extensive European presence, where biosimilars have been around for a while. But Amgen is working with Watson Pharmaceuticals to produce versions of several cancer drugs.
Not everything has worked well for Amgen. An FDA advisory committee voted down its bone metastasis treatment Xgeva earlier this year for a prospective expansion of its indication.
But Amgen's big news was its initiation of a dividend. The company didn't waste any time, immediately starting out with a yield of around 2%. The move bodes well for long-term investors, as it indicates confidence from the company that it will be able to sustain those payments for the long haul.
For retirees and other conservative investors, Amgen's dividend was the best news they could have expected. Shares are still a bit rich, though, and the biotech industry experiences above-average volatility. Unless you're comfortable taking more than typical risk in your retirement portfolio, you might want to wait for Amgen to give you a better chance to pick up shares on the cheap.
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 Amgen to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.