If you're a retiree, you shouldn't own just any stock in your portfolio. Only those companies that are leaders in their industry and that are likely to remain best in breed warrant a spot. With that in mind, I've narrowed down a list of three companies that I think are great ideas for retirees to consider investing in. Read on to learn which three I think make the most sense to stash away.
No. 1: Capitalizing on opportunity
It's no secret that the prices for oil and natural gas have been declining. Massive investments in domestic production coupled with a slow growth in demand for crude overseas has led to a glut in supply.
Although low commodity prices are never a good thing for energy producers in the short term, they can be a blessing in disguise for top shelf companies in the long term. Those best-in-class companies can use their financial flexibility to buy assets from struggling peers, providing them with significant advantages once prices rebound.
Of the big cap global energy companies that are positioned to make lemonade from lemons, my favorite is ExxonMobil (NYSE:XOM). ExxonMobil is a Goliath in energy production, but it's also diversified across refining, retail, and chemical production and that diversification helps insulate it against commodity prices inevitable drops. Last year, ExxonMobil still generated a profit for investors despite commodity price headwinds and this year, the company still managed to remain in the black during Q1. Earnings in 2015 totaled $16.2 billion and earnings in Q1 were $1.8 billion.
ExxonMobil's ability to navigate storms makes it a great name for retirees to own because the company's profit provides it with M&A firepower and the capacity to return money to shareholders via dividends. Over the last 33 years, the company has bumped up its dividend by an average 6.4%. With a healthy dividend yield of 3.19% right now and an enviable track record of dividend increases, owning ExxonMobil in retirement portfolios makes sense, especially if you can buy it on sale.
No. 2: Successfully reinventing itself
Microsoft Corp. (NASDAQ:MSFT) CEO Satya Nadella is transforming Microsoft into a leader in high margin, cloud-software.
In the company's recently reported quarter, Nadella made significant progress in advancing toward his goal of $20 billion in commercial cloud revenue in 2018. Commercial revenue for Microsoft's Office 365 platform grew 54% year-over-year and office consumer products and cloud services sales grew 19% too. Importantly, sales at Azure, its platform for building and managing apps for businesses, doubled in the past year.
The dramatic run-up in cloud sales is more than offsetting slowing sales of PC-based software products and a steep drop in revenue associated with the company's failed mobile phone strategy. In the future, it should be even easier to overcome those headwinds as Windows 10 helps stabilize its legacy business and mobile phone sales shrink to a smaller proportion of total revenue.
Microsoft's tapping into its massive Xbox user base via Xbox Live and it's rolling out a new smaller and more powerful Xbox One S soon. The company's top- and bottom-line may benefit from cross-selling opportunities once its acquisition of LinkedIn is complete too.
With multiple catalysts that could support growth, a balance sheet that remains one of the best going, and a 2.4% dividend yield, Microsoft could be a great stock to own.
No. 3: Back on track
Pfizer, Inc.'s (NYSE:PFE) CEO Ian Reed took over the helm into the teeth of patent expiration on the company's top-selling drug, Lipitor. Facing off against cheap generic alternatives has lopped billions of dollars in sales off of Lipitor's peak sales pace of roughly $13 billion per year and offsetting those lost sales hasn't been easy.
However, Reed's cost-cutting, R&D investments, and acquisitions have put Pfizer in a great position to return to growth and that growth means that retirees could benefit both from greater profitability and a steady stream of dividend hikes in the future.
Pfizer reported its sixth consecutive quarter of operational growth in Q1 and management expects to generate $51 billion in fiscal 2016 sales. If so, then earnings per share could hit $2.38 this year. In both cases, that represents a solid increase from the $49 billion in sales and $2.20 per share in earnings in 2015.
Fast-growing drugs like Ibrance and Eliquis are partially to thank, but the company's $17 billion acquisition of biosimilars leader Hospira helps too. Hospira's pipeline of medicine that works similarly to top selling biologics that are losing patent protection could make Pfizer a giant in generic biosimilars over the coming decade.
Top tier management has proven it's committed to expanding sales and profit and has also shown it's committed to returning money to investors via its dividend. Since 2012, it's quarterly dividend payment has increased by about 50%.
Overall, with Pfizer about to return to dominance in biopharma there's a lot to like about stocking up on this company in portfolios too.