Peace of mind doesn’t have a price. If you are close to retirement, or in retirement, you need solid stocks that churn out cash, year after year. Big Pharma may be just the Rx that your retirement portfolio needs…
Retirement ain’t what it used to be. Traditionally, advisors would tell soon-to-be retirees to dial back on stock holdings in an effort to build a more steady, secure portfolio of income yielding securities. The advice would go something like this; take the number 100, subtract your age, and the the smaller number should be your percentage of holdings in stock. So, a 70 year old man should keep just 30% of his retirement portfolio in stock, and the rest should be in plain vanilla bonds.
This advice may have made sense in the 1980’s, but times have changed, whether we like it or not. I would suggest that most retirees, especially those in good health, own more stocks than in the past. The reasons are the following:
Bond yields continue to be pathetic, and may get even worse. Owning mostly bonds made sense when safe yields at 7, 8, or even 9% could be found in the closing decades of the 20th century. But today’s safer bonds yield a paltry 2, 3 or 4%. Additionally, these yields may actually FALL in the coming years, as the Fed has suddenly indicated reluctance to raise rates further.
Bonds aren’t as safe as they used to be. Did you know that we currently have a record number of major corporations that are just barely clinging to an “investment grade” rating? Many of the biggest corporate names out there are within inches of being downgraded to “junk” borrower status. In addition, many of the common loan covenants, or contractual protections for bond investors, have been slowly but surely eroded to nothing. Theoretically bonds should remain safer than stocks, but during the ultra low interest rates of the last ten years, the American Corporate Bond Market has become the wild west.
Municipal bonds may not be much better. Traditionally these were the safest of safe investments for retirees, because the bond payments were secured by the “full faith and credit” of local governments around the United States. But the “full faith and credit” of Detroit and Puerto Rico didn’t seem to help anyone when it was revealed that these local governments were little more than municipal ponzi schemes that eventually collapsed, as all Ponzi schemes eventually must. In fact, many unseemly reports have surfaced pointing out the dire financial straits that many state and local governments are facing across our fair nation. And this DURING THE GOOD TIMES. Many local governments simply cannot pay their long term obligations; do you really want to be there when the house of cards comes down?
Your likely longevity means you will need growth. Bonds were a great idea when the typical man retired at 65 and was dead by 75. But according to the Social Security Administration, for every person who gets that Medicare card, there is a 25% chance that the retiree will live PAST AGE 90. Funding 25+ years of retirement requires more than just a steady payout.
So your portfolio will probably need more stocks than what your parents or grandparents had. That being said, retirement is no time to “bet the farm” on microcaps and biotech start ups. America’s largest pharmaceutical companies have relentlessly churned out profits and dividends for a century or more. For better or for worse, they are amongst the biggest players on Capitol Hill. They probably sold you pills that are sitting in your medicine cabinet right now. As long as humans continue to value a long and healthy life, Big Pharma will have a role on the World Stage.
The three selections below all have a few things in common that make them safe bets for a retiree. First, they have only modest debt on their balance sheets. Second, they have massively diversified assets, both in terms of therapeutic programs and geography. Third, they have robust cash flow that easily pays for their current dividends. All three survived the financial crisis of 2008 with barely a ding in their financial armour.
These bastions of Big Pharma are likely to pump out cash flow for decades to come…
1. MERCK ($MRK)
Merck may be the hottest name mentioned in this report. Their new cancer immunotherapy, Keytruda, famously brought President Jimmy Carter back from death’s door. After telling the American Public that he was preparing to come home to Jesus, his physicians tried the then brand new Keytruda as a last ditch effort to ward off the nonagenarian’s Melanoma. It worked better than anyone had dreamt. Today President Carter is back to happily building homes for the needy, and Jesus will just have to wait a few more years.
Of course this legendary exploit was only the beginning for Keytruda. It is not always a miracle cancer cure; how it works, when it works, and why it works are still topics of furious scientific investigation. The National Cancer Institute lists dozens of new and ongoing trials with the agent. For an investor, what this means is that Keytruda’s $7 Billion in 2018 sales may be just the beginning of the bonanza!
With that being said, Keytruda still accounts for just 20% of Merck’s sales. The company sports a wide variety of market leading treatments in diabetes, vaccines, and of course oncology.
$MRK has returned an average of 9.4% since 2008; which is not an unusual ten year run for the stock. So, if an investor were to use the dividend for income, and cash in 2.5% of the holding every year, he could easily realize a 5% cash flow annually, and still wind up dying much richer than when he started. Now that looks like a healthy retirement plan.
2. ELI LILLY ($LLY)
Good ‘Ole Eli Lilly Corp is about as American as apple pie. Founded all the way back in 1876 and still run out of Indianapolis, Indiana, Lilly IS Indiana. This means that, even if the company were to fall into trouble somehow, they would very likely get help from FOC (Friends in Congress). Not that they need any help!
$LLY has a commanding position in diabetes, neurology and oncology. The company recently announced a blockbuster acquisition of Loxo Oncology, which should ensure that Lilly remains a leader in the exciting new science of Immuno-oncology. The company has only $12 Billion in debt vrs. $44 Billion in assets, and copious cash flow that easily covers its dividend.
Over the last ten years, Lilly has produced a blistering 12.4% annual return, once again meaning that an investor could realize an annual 5% withdrawal and still die rich. Indianapolis suddenly seems sexy…
3. PFIZER ($PFE)
Does this Titan of American Business really need much introduction? It’s almost for sure that someone in your home has used Lipitor, Viagra or Xanax at some point in their lives. Love ‘em, or hate ‘em, Pfizer corporation has been at American ATM machine for more than a century.
$PFE has survived two world wars, several market crashes and panics, and the occasional regulatory fury. Most importantly, Pfizer has survived its own success, again and again surviving after losing patent protection on blockbusters such as Lipitor. Currently $PFE has a stable of drugs so long that just the “A’s” on an A to Z listing are 26 entries long. Pfizer was there for your Grandfather, and it’s very likely that Pfizer will be there for your grandson. An investment in $PFE ten years ago would have meant that you doubled your money. Wouldn’t that help fund your retirement nicely?
Please don’t put every penny that you have in just these three stocks. A diversified portfolio is still critical for today’s retiree, and bonds still have their place in a secure retirement portfolio. However, if you are looking for bond-like stocks that will produce cash flow for decades, the three giants above are likely safe investments.
Wishing you a healthy portfolio for decades to come….