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.
Swiss drug giant Novartis AG (ADR) (NYSE:NVS) isn’t the best-known pharma stock in the U.S., but it combines two extremely lucrative businesses under one roof, with both proprietary drug development as well as its Sandoz generic division. Can Novartis use that dual strategy to its advantage? Let’s revisit how Novartis does on our 10-point scale.
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 Novartis.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $165 billion | Pass |
| Consistency | Revenue growth > 0% in at least four of five past years | 4 years | Pass |
| Free cash flow growth > 0% in at least four of past five years | 2 years | Fail | |
| Stock stability | Beta < 0.9 | 0.15 | Pass |
| Worst loss in past five years no greater than 20% | (6.9%) | Pass | |
| Valuation | Normalized P/E < 18 | 23.33 | Fail |
| Dividends | Current yield > 2% | 3.6% | Pass |
| 5-year dividend growth > 10% | 10.4% | Pass | |
| Streak of dividend increases >= 10 years | 12 years | Pass | |
| Payout ratio < 75% | 63.4% | Pass | |
| Total score | 8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Novartis last year, the company has held its eight-point score, even as revenue and free cash flow sank last year. The stock has put in a very strong performance, rising about 25% over the past year.
