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.
Medical devices have the potential to change lives, and St. Jude Medical
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 St. Jude Medical.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$11.9 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of past five years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.75||Pass|
|Worst loss in past five years no greater than 20%||(18.9%)||Pass|
|Valuation||Normalized P/E < 18||15.41||Pass|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||NM||NM|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||34.0%||Pass|
|Total score||7 out of 9|
Source: S&P Capital IQ. NM = not meaningful; St. Jude started paying a dividend in March 2011. Total score = number of passes.
Since we looked at St. Jude Medical last year, the company has gained two points. A jump in the dividend yield played a part in the boost, but the stock has disappointed shareholders, falling more than 10% over the past year.
St. Jude is a big player in the heart-valve market, with more than 2 million mechanical valves implanted in patients over the past 30 years. But St. Jude certainly doesn't have that market to itself; Edwards Lifesciences
Another problem that St. Jude has faced is in its device quality. Troubles with its Riata defibrillator lead led to a recall, even though a full year had passed since the company stopped selling the device. St. Jude is far from the only device maker to have similar problems, as Johnson & Johnson
Another threat on the horizon is the new medical-device tax under health care reform. With a 2.3% excise on sales of devices coming, many of St. Jude's industry peers have contemplated layoffs and other cost-cutting measures.
For retirees and other conservative investors, St. Jude's dividend is attractive, and its stock has been relatively stable despite its recent declines. For those expecting a recovery, especially given the demographics favoring increased demand for health-related products, St. Jude looks like an attractive addition to a retirement portfolio.
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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