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Will Amgen Help You Retire Rich?

http://www.fool.com/retirement/general/2012/06/08/will-amgen-help-you-retire-rich.aspx

Dan Caplinger
June 8, 2012

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.

Factor

What We Want to See

Actual

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: