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Will Eli Lilly Help You Retire Rich?

Thursday - 3/7/2013, 4:55pm  ET

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.

Eli Lilly is a major player in the pharmaceutical space, but like many of its peers, it has struggled to deal with patent expirations on some major products. How will Lilly replace the revenue it has lost in the past year? Below, we'll revisit how Eli Lilly 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 Eli Lilly.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$60.2 billion

Pass

Consistency

Revenue growth > 0% in at least four of past five years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

0.70

Pass

 

Worst loss in past five years no greater than 20%

(21.3%)

Fail

Valuation

Normalized P/E < 18

20.39

Fail

Dividends

Current yield > 2%

3.6%

Pass

 

5-year dividend growth > 10%

2.9%

Fail

 

Streak of dividend increases >= 10 years

0 years

Fail

 

Payout ratio < 75%

53.5%

Pass

       
 

Total score

 

5 out of 10

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

Since we looked at Eli Lilly last year, the company has dropped two points, as earnings and free cash flow have dropped. But the stock hasn't held back even in that tough environment, rising more than 40% over the past year.

Lilly took a big sales hit from its patent cliff throughout 2012, as its Zyprexa anti-psychotic drug went off patent in 2011. With Zyprexa having brought in $4.6 billion in worldwide income in 2011, the loss was substantial. Moreover, even though Lilly had other drugs step up to fill the gap, it's slated to lose protection on current top-selling depression drug Cymbalta and insulin-product Humalog this year, with osteoporosis treatment Evista following next year.

Lilly has tried to take steps to sustain profits during its difficult patent-cliff period. Its efforts to cut costs have been a mixed bag, with operating expenses starting to fall but margins having contracted in recent years. Lilly has generally kept its focus throughout the period, eschewing the major corporate maneuvers that rivals have made. Yet international growth hasn't panned out to the extent it had hoped.

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