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.
As one of the biggest biotech companies, 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||$39.3 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||0.45||Pass|
|Worst loss in past five years no greater than 20%||(16.2%)||Pass|
|Valuation||Normalized P/E < 18||18.37||Fail|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||NM||NM|
|Payout ratio < 75%||NM||NM|
|Total score||4 out of 8|
Source: S&P Capital IQ. NM = not meaningful; Gilead doesn't pay a dividend. Total score = number of passes.
Since we looked at Gilead Sciences last year, the company has lost points due to a higher valuation and a lack of free cash flow growth last year. But Gilead is making a high-stakes bet on a lucrative market, and if it pays off, it could be well worth the temporary hit to the company's financials.
Gilead has a wide range of treatments for HIV. Recently, it submitted its HIV quad pill for FDA approval, which could give the company a big boost over its current Atripla treatment because Gilead has to share Atripla revenue with Bristol-Myers Squibb
But Gilead has chosen to look for growth in the fast-moving hepatitis C market. Its huge $11 billion purchase of Pharmasset gave Gilead access to Pharmasset's pipeline of hepatitis C treatments.
So far, that move has borne fruit for Gilead. Last month, the company announced strong results for its hepatitis C drug GS-7977 in combination with a drug from Bristol. Although Gilead faces competition from Vertex Pharmaceuticals
For retirees and other conservative investors, Gilead's failure to pay a dividend is troubling. Yet arguably, the company might not have had the ability to make a big purchase like the Pharmasset takeover if it had returned hard-earned capital to shareholders. If you're willing to go without portfolio income, then Gilead could be worth a closer look -- especially if the stock pulls back to more attractive valuations in the near future.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals 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.