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.

Pfizer (NYSE: PFE) is one of the most prestigious pharmaceutical firms in the world. But like many other big pharma companies, Pfizer has started to see some of its blockbuster drugs come off-patent. Just this past November, Pfizer lost patent protection on Lipitor. Can the drug giant cushion the blow, or is the best over for the company? Below, we'll revisit how Pfizer 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 Pfizer.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $162 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 0.72 Pass
  Worst loss in past five years no greater than 20% (17.0%) Pass
Valuation Normalized P/E < 18 13.96 Pass
Dividends Current yield > 2% 4.2% Pass
  5-year dividend growth > 10% (3.6%) Fail
  Streak of dividend increases >= 10 years 3 years Fail
  Payout ratio < 75% 68.8% Pass
  Total score   6 out of 10

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

Since we looked at Pfizer last year, the company has lost a point. The drug giant still has some of what conservative investors like to see in a stock, although it hasn't kept its sales growing as well as some would prefer.

The entire drug industry is seeing many of the challenges that Pfizer faces. Eli Lilly (NYSE: LLY) faces its own patent cliff and saw its earnings per share drop a whopping 22% last quarter, with revenue contracting 2%.

But Pfizer is having to deal with an an especially big hit to its bottom line. After losing Lipitor in November, overall revenue dropped 4%, and the only way the company could keep income up was to cut expenses to the bone -- with a 17% cut in R&D spending being especially painful. The company will have a chance to replace some of that lost revenue if it and partner Bristol-Myers Squibb (NYSE: BMY) can get their blood thinner Eliquis approved.

The big question is whether Pfizer will join the growing number of companies making major buyouts. Gilead Sciences (Nasdaq: GILD) bought out Pharmasset for its hepatitis C pipeline, while Bristol-Myers Squibb grabbed up Inhibitex (Nasdaq: INHX) for the same purpose.

For retirees and other conservative investors, Pfizer's dividend -- which has bounced back somewhat since its 50% cut a few years ago -- is the most attractive thing about the stock. But with so much uncertainty in its near future, Pfizer may not be the best buy at this time, unless you're willing to take on plenty of pipeline-related risk in the near future.

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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Editor's note: A previous version of this article failed to consider Pfizer's court victory upholding Viagra's market exclusivity for the erectile dysfunction drug until 2019. The Fool regrets the error.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Pfizer and Gilead Sciences. 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.