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.
Pfizer Inc. (NYSE:PFE) has done a far better job of sustaining its business recently than most people expected as the Dow Jones Industrial Average‘s largest pharmaceutical component has handled the loss of patent protection on some of its highest-selling drugs. But now the company needs to work its pipeline to come up with viable long-term replacements for those former blockbusters. Below, we’ll revisit how Pfizer 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 Pfizer.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $199 billion | Pass |
| Consistency | Revenue growth > 0% in at least four of five past years | 3 years | Fail |
| Free cash flow growth > 0% in at least four of past five years | 2 years | Fail | |
| Stock stability | Beta < 0.9 | 0.74 | Pass |
| Worst loss in past five years no greater than 20% | (17%) | Pass | |
| Valuation | Normalized P/E < 18 | 17.71 | Pass |
| Dividends | Current yield > 2% | 3.6% | Pass |
| Five-year dividend growth > 10% | (5.4%) | Fail | |
| Streak of dividend increases >= 10 years | 4 years | Fail | |
| Payout ratio < 75% | 49.5% | Pass | |
| Total score | 6 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Pfizer last year, the company wasn’t able to regain the point it lost from 2011 to 2012. But that didn’t hold back Pfizer’s stock, which has gained almost 30% over the past year.
Pfizer managed to make the most of a tough situation last year as its Lipitor cholesterol drug went off patent toward the end of 2011. With sales of the all-time best-selling drug down by more than 50%, Pfizer has implemented cost-cutting measures like further reductions in staffing in order to sustain profits.
But recently, Pfizer has managed to use its extensive bench of low-volume drugs to boost overall sales. In its most recent quarter, Pfizer predictably saw big drops in revenue, but it still topped expectations because of contributions from its lesser-known products.
Looking forward, Pfizer has some big prospects coming from its pipeline. Its Eliquis blood-clot treatment got FDA approval in late December, with both Pfizer and partner Bristol Myers Squibb Co. (NYSE:BMY) looking for the drug to deliver blockbuster potential. Meanwhile, in November the FDA approved Pfizer’s rheumatoid arthritis drug Xeljanz, which will go up against AbbVie Inc (NYSE:ABBV)‘s Humira and tap into what could become a $2 billion market for the drug.
One big move Pfizer made was to spin off its Zoetis Inc (NYSE:ZTS) animal health business. Although Zoetis is now separately traded, Pfizer retains an 80% stake in the company. With the shares having risen modestly since the IPO earlier this month, Pfizer could see further gains if the spinoff successfully unlocks more of Zoetis’ value.
For retirees and other conservative investors, Pfizer’s dividend cut during the financial crisis still stings, but the company has avoided major stock losses and has raised its payout for four straight years. Recent share-price gains make the stock look a bit expensive, but Pfizer still represents a reasonably solid play for retirement investors.
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The article Will Pfizer Help You Retire Rich? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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