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 GlaxoSmithKline (NYSE: GSK) 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 GlaxoSmithKline.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $107.4 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 0.28 Pass
  Worst loss in past five years no greater than 20% (22.7%) Fail
Valuation Normalized P/E < 18 13.33 Pass
Dividends Current yield > 2% 4.8% Pass
  5-year dividend growth > 10% 8.0% Fail
  Streak of dividend increases >= 10 years 6 years Fail
  Payout ratio < 75% 179.1% Fail
       
  Total score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

GlaxoSmithKline managers to score just four points, leaving conservative investors without many of the things they like to see in a stock. With sales and free cash flow on the decline and the company's dividend sustainability in question, the pharma stock's future is in serious doubt.

At first glance, Glaxo pays an impressive dividend. But when you compare it with similar yields from Pfizer (NYSE: PFE), Eli Lilly (NYSE: LLY), and Novartis (NYSE: NVS), you'll notice that their payout ratios are much lower, showing that earnings are high enough to help Glaxo's rivals keep their dividend payments up.

Nevertheless, big pharma companies like Glaxo are spending significant amounts of money to buy back shares of their own stock. Merck (NYSE: MRK) authorized a $5 billion buyback a few months ago, and AstraZeneca (NYSE: AZN) also announced a plan to buy back shares.

One trend that Glaxo is following is to sell off some of its less essential businesses. In April, the company announced that it would sell off 19 of its over-the-counter brands. In doing so, Glaxo joins many of its peers in spinning off or selling non-core segments to focus more strongly on their primary businesses.

Many pharma stocks are having to reinvent themselves, and Glaxo is no exception. With so many patent cliffs coming in the near future throughout the industry, Glaxo faces a dog-eat-dog environment to build partnerships and find potential takeover targets to enhance its long-term prospects. Even if it succeeds, Glaxo will look much different in the years to come -- and retirees and other conservative investors might well be more comfortable waiting to see what pans out before investing.

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 in this article. You can follow him on Twitter here. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of Novartis, Pfizer, and GlaxoSmithKline. 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.