Will Johnson & Johnson Help You Retire Rich?

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.

Johnson & Johnson (JNJ -1.15%) is the biggest health-care stock in the Dow Jones Industrials (^DJI -0.98%) for a reason: It's a massive health-care conglomerate that includes not only pharmaceuticals, but also consumer products and medical devices. But with other companies taking steps to slim down, will J&J buck the trend and stay big? Below, we'll revisit how Johnson & Johnson 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 Johnson & Johnson.

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

Since we looked at Johnson & Johnson last year, the company hasn't been able to regain either of the two points it lost from 2011 to 2012. Yet that hasn't held the stock back, as shares have risen more than 20% over the past year.

Johnson & Johnson has a lot more going for it than Band-Aids. Lately, the company's pharma segment has made some big moves forward. With a strong stable of drugs including prostate cancer treatment Zytiga, which brought in $961 million in revenue last year, J&J has produced some amazing growth recently. Zytiga is the low-cost option in the market, beating out Medivation's (MDVN) Xtandi on price and providing the convenience of an oral medication, unlike the existing injectable drugs in the space.

Meanwhile, J&J also has an impressive pipeline. For instance, sirukumab, which it's developing alongside GlaxoSmithKline (GSK 0.12%), will treat rheumatoid arthritis, and after promising early results, two Phase 3 trials are currently ongoing. Without the patent-cliff pressures that many rivals face, J&J has been able to stay collected in its drug development.

But not everything has gone perfectly for J&J. On top of numerous recalls in the consumer products division in recent years, the company had to recall its Adept hip implants last month due to high failure rates. The episode is another black eye for the hard-hit J&J, and it raises questions about ongoing quality-control.

Still, for retirees and other conservative investors with a long-term time horizon, it's hard to argue against a streak of 50 consecutive annual dividend increases producing a yield of more than 3%. Even at a slightly expensive valuation, J&J is worth strong consideration as a major part of a typical retirement investor's health care exposure.

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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