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.

No company has a more all-encompassing reach into the health-care industry than Johnson & Johnson (NYSE: JNJ). With its combination of medical devices, pharmaceuticals, and consumer over-the-counter products, J&J is a true health-care conglomerate, with exposure to every corner of the industry. But in recent years, the company has had to deal with a rash of recalls. Can J&J recover its lost shine? Below, we'll revisit how Johnson & Johnson 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 Johnson & Johnson.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $177 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.53 Pass
  Worst loss in past five years no greater than 20% (7.7%) Pass
Valuation Normalized P/E < 18 20.82 Fail
Dividends Current yield > 2% 3.5% Pass
  5-year dividend growth > 10% 9.1% Fail
  Streak of dividend increases >= 10 years 49 years Pass
  Payout ratio < 75% 63.6% Pass
  Total score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Johnson & Johnson last year, the company has fallen by two points. A slight decline in J&J's dividend growth rate isn't a huge cause for concern, but a much higher valuation and another failure to grow free cash flow aren't the best signs for the stock.

J&J has a long history of solid growth. Until 2009, the company sported a record of annual sales gains that spanned more than three-quarters of a century. But then, a combination of a weak economy cutting demand for medical devices, loss of patent protection on some key drugs, and product recalls on the consumer side led to revenue losses. Patients fled to Merck (NYSE: MRK) and Pfizer (NYSE: PFE), neither of which suffered the same sort of product-recall problems.

But the big news for J&J going forward is next month's departure of decade-long CEO Bill Weldon. That'll be vital for the company to regain some of its lost luster from consumer product recalls, especially in light of new competition coming. Perhaps sensing weakness, a joint venture between generic-drug maker Teva Pharmaceutical (Nasdaq: TEVA) and consumer giant Procter & Gamble (NYSE: PG) will go up against J&J in the over-the-counter medication arena, where patents typically don't apply.

For retirees and other conservative investors, a quickly rising payout ratio may actually be the biggest concern. With a dividend yield of 3.5%, shareholders should be content for now. But if that yield starts to erode, then you can expect the goodwill that J&J has produced over the years to disappear fairly quickly.

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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