Recs

2

Will GlaxoSmithKline 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.

GlaxoSmithKline (NYSE: GSK  ) may not have the name awareness in the U.S. that some of its competitors have, but the company is a huge player in the global pharmaceutical industry. Like other big companies, though, Glaxo is looking for ways to diversify its product lineup beyond blockbusters like its asthma treatment Advair. Can the drug company succeed where others have struggled? Below, we'll revisit how GlaxoSmithKline 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 GlaxoSmithKline.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $113 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 2 years Fail
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.24 Pass
  Worst loss in past five years no greater than 20% (22.7%) Fail
Valuation Normalized P/E < 18 15.25 Pass
Dividends Current yield > 2% 4.7% Pass
  5-year dividend growth > 10% 7.7% Fail
  Streak of dividend increases >= 10 years 7 years Fail
  Payout ratio < 75% 67.9% Pass
       
  Total score   5 out of 10

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

Since we looked at GlaxoSmithKline last year, the company has jumped a point. A reduction in payout ratio helped boost the score, but more importantly, Glaxo's stock has held up pretty well, up about 5% in the past year.

Glaxo has an impressive lineup of drugs, but like all pharma companies, it wants more. In pursuit of that end, it has made a number of strategic moves. Glaxo created an HIV-specialized joint venture with Pfizer (NYSE: PFE  ) to develop treatments for the immune disease, and its dolutegravir has competed well against products from other HIV drug makers, including Gilead Sciences (Nasdaq: GILD  ) and its Atripla cocktail.

The company also recently wrapped up a huge acquisition. Earlier this week, Glaxo finally bit the bullet and raised its bid for Human Genome Sciences (Nasdaq: HGSI  ) . By paying $14.25 per share for the stock, Glaxo ensures it will have the rights to newly approved lupus drug Benlysta. Although the drug has gotten off to a slow start, it has huge potential as the first lupus drug approved in 50 years.

In addition, Glaxo raised its stake in biotech company Theravance (Nasdaq: THRX  ) earlier this year. With Relovair, the experimental drug for asthma and lung disease, Glaxo hopes that it will have its successor to Advair when it loses patent protection.

For retirees and other conservative investors, Glaxo maintains a strong dividend while maintaining the flexibility to make multiple acquisitions. The company hasn't produced the growth that many investors would prefer to see, and its dividend payout ratio is still a bit on the higher side. But for those willing to take a little risk in their retirement portfolio, Glaxo makes a good income-producing investment.

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 GlaxoSmithKline 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. Motley Fool newsletter services have recommended buying shares of Pfizer and Gilead Sciences. 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.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1946498, ~/Articles/ArticleHandler.aspx, 4/16/2014 9:31:17 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

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.

Today's Market

updated 12 hours ago Sponsored by:
DOW 16,262.56 89.32 0.00%
S&P 500 1,842.98 12.37 0.00%
NASD 4,034.16 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/15/2014 4:01 PM
GSK $52.32 Up +0.48 +0.00%
GlaxoSmithKline CAPS Rating: ****
GILD $68.17 Up +1.38 +0.00%
Gilead Sciences CAPS Rating: ****
HGSI.DL $0.00 Down +0.00 +0.00%
Human Genome Scien… CAPS Rating: **
PFE $29.89 Down +0.00 +0.00%
Pfizer CAPS Rating: ****
THRX $27.19 Down +0.00 +0.00%
Theravance, Inc. CAPS Rating: **

Special Offer for Savvy Investors Like You!

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut semper dui vitae molestie venenatis. Suspendisse.

Enter Email Address:



Privacy / Legal Information
Advertisement