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 (NYSE: NVS), however, plays both sides of the fence, with both proprietary drugs and generics of its own. Can Novartis buck the headwinds that fellow European stocks have faced? Below, we'll revisit how Novartis 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 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 (Nasdaq: TEVA).

Generics have brought Novartis some big successes, especially as it marketed generic versions of blockbuster drugs including Sanofi's (NYSE: SNY) Lovenox and Lilly's (NYSE: LLY) Gemzar. Moreover, as those companies and several others face patent cliffs on other drugs, Novartis will see even more opportunity from generics.

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 (Nasdaq: BIIB) and its BG-12 pipeline drug. Moreover, the company had to close a Nebraska plant temporarily earlier this year and issue a recall of over-the-counter products including Excedrin and Bufferin. With hypertension drug Diovan going off patent, Novartis will need help keeping its sales up.

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.

Keep searching
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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

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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.