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.
What We Want to See
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.
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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