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.
Many drug companies lately have had their shareholders nervous about looming patent cliffs. When blockbuster drugs go off-patent, they can present big challenges to the companies that have benefited from patent protection for years. Novartis
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 Novartis.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$133 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past 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||0.17||Pass|
|Worst loss in past five years no greater than 20%||(6.9%)||Pass|
|Valuation||Normalized P/E < 18||16.13||Pass|
|Dividends||Current yield > 2%||4.6%||Pass|
|5-year dividend growth > 10%||13.6%||Pass|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||58.9%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Novartis last year, the company has dropped a point. Yet the small fall in free cash flow that cost it that point shouldn't pose a big threat to the drugmaker.
Novartis is unusual in its two-pronged approach toward drug production. On one hand, it has a stable of branded drugs. Yet it also produces generics through its Sandoz division, a model that puts it into direct competition with primary generic-maker Teva Pharmaceutical
Generics have brought Novartis some big successes, especially as it marketed generic versions of blockbuster drugs including Sanofi's
But Novartis has had some troubles lately. Its Gilenya treatment for MS has raised cocnerns about unexplained deaths, boosting prospects for potential competitor Biogen Idec
For retirees and other conservative investors, Novartis has an extremely healthy dividend. The question, though, is whether the company is poised to survive patent expirations. With its generic division, Novartis actually has more going for it than many of its competitors.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Teva Pharmaceutical. Motley Fool newsletter services have recommended buying shares of Teva Pharmaceutical and Novartis. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.