Most retirees don't want to spend their Novembers worrying about their investment portfolios. They have more important things to focus on -- like spending time with family and friends, and preparing for a huge Thanksgiving dinner. If you, too, would like to rest easy this month when it comes to your nest egg, our analysts suggest these three stock buys: pharmaceutical giant GlaxoSmithKline (NYSE:GSK), Warren Buffett's holding company Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), and home improvement leader Home Depot (NYSE:HD).
A shot in the arm for income investors
Sean Williams (GlaxoSmithKline): Retirees who are looking for a high-yield, low-volatility stock would be wise to consider big pharma stalwart GlaxoSmithKline.
One of the bigger concerns for GSK in recent years has been the imminent decline in sales of asthma and COPD drug Advair. Advair's patent exclusivity expired a few years ago, but generic versions have yet to hit the market. However, a few are expected within the next three years, and the formerly $8-billion-a-year drug could be generating less than $2 billion a year for the company by 2020.
The good news is that GlaxoSmithKline has made a lot of changes to fortify its future growth prospects. One of the biggest was a transformational asset swap with Novartis that was completed last year. GSK sold its small-molecule oncology development platform for $16 billion, acquired Novartis' vaccine operations (minus influenza) for about $7 billion, and the duo formed a joint-venture for their consumer health products divisions. These moves helped GSK diversify its revenue stream, and improve its margins and pricing power with all three of its operating segments: pharmaceuticals, vaccines, and consumer health products.
New drug launches are another source of growth for GSK. The company is the majority owner of ViiV Healthcare, the company behind innovative HIV medicines Triumeq and Tivicay. Sales of both drugs have combined to more than double through the first-half of 2016 to $1.4 billion. Sales of GSK's next-generation long-lasting COPD and asthma treatments are ramping up, too. After a brief period of concern regarding insurer coverage, Breo Ellipta and Anoro are experiencing a sales surge. In fact, the gains from new drug growth are eclipsing what GlaxoSmithKline is losing from declining Advair sales.
With the company sporting a 5.2% yield, more than twice that of the S&P 500 and roughly four times the current rate of inflation, GlaxoSmithKline could be the perfect income stock for retirees to buy now.
Ride the coattails of the world's greatest investor
Brian Feroldi (Berkshire Hathaway): This massive conglomerate owns dozens of businesses outright and holds large stakes in many others, a portfolio predominately hand-picked by Warren Buffett. The company's extreme diversification helps to ensure that it can thrive under a wide range of economic conditions, and makes its operations extremely stable.
The bull thesis for buying Berkshire is that the company will continue to produce a huge cash flow that its investment managers will use to acquire more businesses. This simple formula should propel Berkshire's book value steadily higher over time, providing investors with a great shot at market-beating returns.
Buffett has openly stated that he would happily buy back shares of Berkshire at 1.2 times book value, because he believes the company's intrinsic value far exceeds that multiple. Right now, shares are trading around 1.35 times book value, which suggests that shares are still modestly undervalued. That tells me that it is a great time to consider buying a few shares of this iconic business.
Strong dividend growth from an industry leader
Brian Stoffel (Home Depot): Though I agree with Brian that Berkshire Hathaway is a solid choice, I think most great retirement stocks should also have a solid dividend. Though Home Depot's yield right now -- 2.2% -- might not seem impressive, I think there's lots of room for it to grow.
The key metric for income investors to watch is free cash flow (FCF); this represents the amount of money a company takes in from its normal business, minus any capital expenditures. At the end of the day, it is from FCF that dividends are paid. Here are Home Depot's trends over the past few years.
There are three key takeaways from this chart:
- Home Depot's FCF has been growing steadily.
- Likewise, its dividend has grown steadily -- up an average of 22% per year over the past three years.
- The dividend itself is only eating up 31% of FCF.
Such a low payout ratio means that even if the home improvement cycle hits a downturn, Home Depot should have no problem paying its dividend. If, however, business continues to steadily improve, there's no reason to believe its days of dividend growth are over.
The home improvement industry is highly fragmented, and Home Depot is the top dog with a 24% market share. That means there's still lots of business out there to capture, and it is the best positioned company to do so.
At the end of the day, you want a retirement portfolio that works for you. All three of these companies can do that -- and allow you to focus on what really matters as we head into this holiday season.