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.
Novartis AG (ADR) (NYSE:NVS) has been going through the same phenomenon as many of its pharma peers, as patent-cliff issues have hit the company hard. With top-selling hypertension drug Diovan seeing higher competition from generics after having lost patent protection last September, Novartis will continue to see unfavorable comparisons through most of 2013.
But Novartis has a promising stable of drugs that could be able to restore sales. Lucentis, on which Novartis is partnering with Roche, treats macular degeneration. Although Regeneron Pharmaceuticals Inc (NASDAQ:REGN) has a competing drug, Eylea, that has done exceedingly well. Eylea hasn’t hurt Lucentis’s sales, though, at least to this point, as the macular-degeneration market has expanded because of aging populations and the expansion of Lucentis’ indications to treat diabetic macular edema. In addition, multiple-sclerosis treatment Gilenya is poised to make its own contribution to Novartis’ top-line growth even as the multibillion-dollar MS market heats up with more competition.
Meanwhile, where the real growth may lie is in Sandoz. With U.S. health-care reform stressing cost savings, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) and Novartis have both sought to position their respective generic businesses to take maximum advantage of the trend. With years to go before health-care laws fully take effect, it’s too early to tell whether Novartis AG (ADR) (NYSE:NVS) can grow from the opportunity, but it’s promising nevertheless.
For retirees and other conservative investors, a solid track record of dividend growth and a high yield offset to some extent a rich valuation for the stock. At somewhat cheaper prices, though, it would be a lot easier to recommend Novartis AG (ADR) (NYSE:NVS) as a promising piece of a core retirement portfolio.
The article Will Novartis Help You Retire Rich? originally appeared on Fool.com.
Fool contributor Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned.
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