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. As part of an ongoing series, I'm looking today at 10 measures to show whether Teva Pharmaceutical (TEVA 0.45%) makes a great retirement-oriented stock.
Teva stands out from its pharmaceutical peers because of its dual focus on both proprietary and generic drugs. In particular, its ability to make money when its rivals' drugs go off-patent has brought Teva impressive profits over the years. Below, we'll revisit how Teva Pharmaceutical 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 Teva Pharmaceutical.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Size |
Market cap > $10 billion |
$34.3 billion |
Pass |
|
Consistency |
Revenue growth > 0% in at least four of past five years |
5 years |
Pass |
|
Free cash flow growth > 0% in at least four of past five years |
4 years |
Pass | |
|
Stock stability |
Beta < 0.9 |
0.38 |
Pass |
|
Worst loss in past five years no greater than 20% |
(21.2%) |
Fail | |
|
Valuation |
Normalized P/E < 18 |
13.97 |
Pass |
|
Dividends |
Current yield > 2% |
3.1% |
Pass |
|
5-year dividend growth > 10% |
21.1% |
Pass | |
|
Streak of dividend increases >= 10 years |
13 years |
Pass | |
|
Payout ratio < 75% |
43.6% |
Pass | |
|
Total score |
9 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Teva Pharmaceutical last year, the company has picked up a point, with its free cash flow having returned to its past growth trajectory. But the stock has languished, falling about 10% over the past year.
Teva has been in the sweet spot of the pharmaceutical industry for years. Its plentiful generic drugs provide low-cost alternatives to expensive branded drugs as soon as their patent protection ends, helping to keep health care costs down. Although Teva isn't the only company in the generics space, it's the major player and gains benefits from its size and geographical scope.
But on the proprietary drug front, Teva faces potential new competition for its blockbuster Copaxone drug to treat multiple sclerosis. The European Union's drug regulatory agency recommended Biogen Idec's (BIIB 2.34%) Tecfidera drug last week for approval, and a final decision could come within the next couple of months. Meanwhile, in the U.S., Tecfidera is up for consideration before the FDA, and because it's a pill rather than an injected drug, many analysts expect the drug to take over the market, posing a big threat to Teva's position in treating MS.
Still, Teva has ramped up in both segments of its business. Teva's Azilect treatment for Parkinson's disease has seen sales rise strongly in recent quarters, albeit with a relatively small contribution to sales at present. Moreover, its acquisition of Cephalon back in late 2011 helped add to its pipeline of branded drugs.
The big question facing Teva is whether other major pharma players will get more involved in generics. Pfizer (PFE 1.10%) has had a positive experience in managing its Lipitor sales after its patent expired, showing how fighting back even after patent protection ends can help make the best of a bad situation. Moreover, even though Abbott Labs (ABT 2.47%) has spun off its branded-drug division, it continues to run a generics business that it could decide to expand upon as part of the company's new focus. For now, though, Teva still has the leadership role in the generics space.
For retirees and conservative investors, Teva's 3% yield and growing dividend payments have brought the pharmaceutical company closer to what most of its peers pay to shareholders. With the potential for far more growth as health-care payers seek to cut their expenses, Teva deserves strong consideration for 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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