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 Amgen (Nasdaq: AMGN) has what we're looking for.

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 Amgen.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $54.7 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth> 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.46 Pass
  Worst loss in past five years no greater than 20% (32.0%) Fail
Valuation Normalized P/E < 18 16.81 Pass
Dividends Current yield > 2% 0.0% Fail
  5-year dividend growth > 10% 0.0% Fail
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% NM NM
  Total score   4 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Amgen doesn’t make a payout. Total score = number of passes.

With only four points, Amgen falls short on several key elements that conservative investors like to see. Although the company plans to pay its first dividend in the near future, Amgen still faces the ever-present challenge of bolstering its stable of drugs to maintain revenue.

Investors expect cash-flow-rich pharma stocks to reward investors with strong dividends, and that's exactly what they get from many companies. Eli Lilly (NYSE: LLY) has a yield of more than 5%, while both Pfizer (NYSE: PFE) and Merck (NYSE: MRK) weigh in with yields close to 4%. In that light, Amgen's lack of a dividend has been disturbing.

But the company is changing that, having announced plans for its first dividend. But investors weren't impressed, as at current prices, the projected yield would be less than 2%.

Meanwhile, Amgen is trying to strengthen its stable of drugs, with mixed results. Most recently, the company has tried to get FDA approval to expand the use of its cancer drug Xgeva to cover patients who haven't yet suffered bone metastasis. The expansion would allow patients to use the drug before taking a rival medication, such as Dendreon's (Nasdaq: DNDN) Provenge or Sanofi's (NYSE: SNY) Taxotere. But so far, clinical trial data hasn't provided definitive answers about Xgeva. Similarly, another study of lung-cancer drug motesanib failed to show extended survival rates.

Amgen faces many of the same challenges as other drugmakers. For retirees and other conservative investors, though, the lack of a dividend has been a yellow flag, forcing investors to count on growth to provide the returns they want. But if the company can establish a good track record of strong dividend growth, Amgen might earn a place in retirement portfolios.

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.

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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended Pfizer. 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.