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. Let's figure out what makes a great retirement-oriented stock, then examine whether Gilead Sciences
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 Gilead Sciences.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$33.0 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of past five years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.39||Pass|
|Worst loss in past five years no greater than 20%||(16.2%)||Pass|
|Valuation||Normalized P/E < 18||14.86||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||NM||NM|
|Payout ratio < 75%||0%||Pass|
|Total score||7 out of 9|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 7, Gilead Sciences has a lot of what conservative investors like to see from a stock. Gilead doesn't pay a dividend, but its consistent growth and stable stock price make the company a promising place to consider new investment.
Gilead has focused on treating HIV and has a strong network of treatments in its arsenal. But the problem is that many of them rely on partnerships with other companies. For instance, its Atripla cocktail includes a drug from Bristol-Myers Squibb
Recently, though, Gilead's profits have disappointed. Because fears of a flu pandemic have largely faded into the background, sales of Tamiflu have declined sharply. And increased R&D costs are hurting the bottom line.
For the longer term, the drugmaker is taking steps to broaden its scope. It recently announced a research partnership with Yale to try to develop cancer drugs. As competitors like Pfizer
Gilead has many of the same risks as other pharmaceutical stocks seeking new drugs to replace old success stories . But with the company taking steps to shore up its future, retirees and other conservative investors can have some confidence in Gilead's prospects going forward.
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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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Gilead Sciences is a Motley Fool Stock Advisor recommendation. Johnson & Johnson and Pfizer are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is also a Motley Fool Income Investor pick. The Fool and Alpha Newsletter Account, LLC own shares of Johnson & Johnson. 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.