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.

Medical devices have the potential to change lives, and St. Jude Medical (NYS: STJ) has been an important part of that industry for years. But even though health problems don't wait for economic recoveries to happen, St. Jude has still felt pressure from weak economic conditions, as many patients have deferred whatever elective procedures they can. Will a rebound help the device-maker? Below, we'll revisit how St. Jude Medical 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 St. Jude Medical.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $11.9 billion Pass
Consistency Revenue growth > 0% in at least four of past five years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.75 Pass
  Worst loss in past five years no greater than 20% (18.9%) Pass
Valuation Normalized P/E < 18 15.41 Pass
Dividends Current yield > 2% 2.4% Pass
  5-year dividend growth > 10% NM NM
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 34.0% Pass
       
  Total score   7 out of 9

Source: S&P Capital IQ. NM = not meaningful; St. Jude started paying a dividend in March 2011. Total score = number of passes.

Since we looked at St. Jude Medical last year, the company has gained two points. A jump in the dividend yield played a part in the boost, but the stock has disappointed shareholders, falling more than 10% over the past year.

St. Jude is a big player in the heart-valve market, with more than 2 million mechanical valves implanted in patients over the past 30 years. But St. Jude certainly doesn't have that market to itself; Edwards Lifesciences (NYS: EW) has been a particularly strong competitor, with double-digit sales growth and solid gains for the stock proving its long-term mettle. And although robotic pioneers Intuitive Surgical (NAS: ISRG) and MAKO Surgical (NAS: MAKO) don't have much overlap with St. Jude's areas of expertise, they may in the long run diversify the range of their procedures and start to be a bigger threat to the company.

Another problem that St. Jude has faced is in its device quality. Troubles with its Riata defibrillator lead led to a recall, even though a full year had passed since the company stopped selling the device. St. Jude is far from the only device maker to have similar problems, as Johnson & Johnson (NYS: JNJ) and Edwards have both had their own issues. Still, it's never a positive to have to do a recall.

Another threat on the horizon is the new medical-device tax under health care reform. With a 2.3% excise on sales of devices coming, many of St. Jude's industry peers have contemplated layoffs and other cost-cutting measures.

For retirees and other conservative investors, St. Jude's dividend is attractive, and its stock has been relatively stable despite its recent declines. For those expecting a recovery, especially given the demographics favoring increased demand for health-related products, St. Jude looks like an attractive addition to a 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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Also, to discover more about the robotic surgical revolution, read our special premium report covering MAKO Surgical and learn all you need to know about the company. Get your copy of the report, and the ongoing coverage it will offer, today by clicking here.

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

The article Will St. Jude Medical Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Intuitive Surgical, Johnson & Johnson, MAKO Surgical, and St. Jude Medical. Motley Fool newsletter services have recommended buying shares of MAKO Surgical, Johnson & Johnson, and Intuitive Surgical. 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 a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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