Is St. Jude Medical the Right Stock to Retire With?

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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. Let's figure out what makes a great retirement-oriented stock, then examine whether St. Jude Medical (NYS: STJ) has what we're looking for.

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 St. Jude Medical.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$14.2 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years5 yearsPass
 Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.90.67Pass
 Worst loss in past five years no greater than 20%(27.2%)Fail
ValuationNormalized P/E < 1817.61Pass
DividendsCurrent yield > 2%1.9%Fail
 5-year dividend growth > 10%NMNM
 Streak of dividend increases >= 10 years1 yearFail
 Payout ratio < 75%31.3%Pass
    
 Total score 5 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; St. Jude started paying a dividend in March 2011. Total score = number of passes.

St. Jude Medical comes in with a midrange score of 5. The company just recently got on the dividend bandwagon, though, suggesting that given enough time, St. Jude could look a lot more attractive to conservative investors.

St. Jude makes medical devices, with an emphasis on heart-related applications. The company set the standard for mechanical heart valves, and its products now sell around the world.

The problem for the company lately has been a slow economy. Like fellow device-makersMedtronic (NYS: MDT) , Stryker (NYS: SYK) , and Boston Scientific (NYS: BSX) , St. Jude suffers when patients delay procedures in favor of cheaper alternatives. For instance, with implantable heart-rhythm devices costing $25,000, studies suggesting that cheaper drug therapies do just as good a job may resonate with cost-conscious patients.

However, even with its heart business being weak, St. Jude has other irons in the fire. Right now, the company has targeted 18 potential growth markets, ranging from strokes and migraines to Parkinson's disease. Yet the combination of potentially tougher regulation and increased competition was enough to knock Johnson & Johnson (NYS: JNJ) out of the drug-eluting stent market, suggesting that nothing's going to come easy for device-makers.

Retirees and other conservative investors know that health care is a growing industry. But that doesn't make every health-care stock a good buy. Although the stock seems to be on the right track, St. Jude needs to show you how it'll get out of its doldrums before you add it to your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add St. Jude Medical to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of Johnson & Johnson, St. Jude Medical, and Medtronic.Motley Fool newsletter serviceshave recommended buying shares of Stryker and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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