by Travis Johnson, Stock Gumshoe | August 26, 2013 8:01 am
It isn’t necessarily easy to make money from broad demographic shifts, since they take time and are difficult to predict in a detailed way — but the move of the baby boom generation through the various stages of their life to now has had a momentous impact on almost every part of American life, from health care to education to public works to investing to, well, whatever you can think of. The boomers have been the American generation that has most enjoyed the fruits of the “American Century”, and they’re continuing to shape our society and our economy as they begin to retire.
Does that mean we can get rich from planning on that? Well, maybe — but it’s not particularly easy. We’ve never had a large cohort of people retire from work and expect to maintain their lifestyle for another 30 years before, but that’s what many 60-year-olds are looking at today: Great health and expected longevity, at least compared to 60-year-old’s of their parent’s generation, but dramatic financial insecurity for even the upper middle class folks in that group. It’s hard to finance 30 years of retirement[1] and high health care costs from the savings you’ve acquired during 40 years of work, especially if — unlike younger folks now — you worked with the expectation that your pension (if you were lucky enough to still have one) and Social Security[2] would keep you out of poverty. They still might, but it’s certainly not a guarantee for everyone.
We’ve seen plenty of stocks touted as “baby boomer” picks over the years — there was a push for buying the makers of mobile homes back in the mid-2000s, for example, because pundits assumed that, like past retirees, a portion of the boomers would become RV enthusiasts and drive up the profits for folks like Winnebago and Thor Industries (both have done well over the last 15 years, incidentally, though they haven’t been immune to the market’s gyrations). But the big tout is almost always health care and related businesses — it seems downright certain that healthcare[3] spending will rise as the population ages, and that we’ll need big investment in other sectors, like an increase in the number of nursing home beds.
Of course, if we’re going to avoid having health care cripple the economy there will have to be some more change to keep costs under control, whether it’s regulatory or societal or technological, but the trend is likely to still be that more older people means more spending on health care.
So that’s the basic backdrop behind the latest teaser from Zachary Scheidt[4] for his Income & Dividend Report that’s published by Contrarian Profits[5] (that’s one of the multitude of Agora[6]-affiliated publishers, they were called Insiders Strategy Group until a few months ago, and before that they were called Taipan[7]). Scheidt hasn’t been at Income & Dividend Report very long, and it’s a pretty new letter, but he’s been around the industry for several years and we’ve covered some of his teasers in the past — most of them focused on options[8] trading and on international growth stocks.
So what’s he teasing now as the “best income investment in America?” He calls it the Boomer Index. Here’s his intro:
“The shockingly simple reason the “Boomer Index” raised its dividend – for 51 straight years…
“If you could own only one stock, this is it… ‘This is the best income investment in America right now’ ….
“I call this investment the “Boomer Index” because its profits have steadily increased with the age of the ‘Baby Boom’ generation, those born in the two decades after World War II.
“Quite simply, the older baby boomers get, the more the ‘Boomer Index’ has paid to investors.
“It’s worked that way for the last 51 years… In every single year since 1962, the ‘Boomer Index’ has increased its quarterly dividend payments.”
And he gets a bit more specific as well …
“Because of the massive growth in the 65-plus age group – 10,000 additional people every day – the profits behind the ‘Boomer Index’ are exploding.
“In fact, the earnings behind the ‘Boomer Index’ doubled in the most recent quarter. The ‘Boomer Index’ is up 37% already this year… That’s even better than the surging S&P 500, which is only up 24%….
“If you invest in the ‘Boomer Index,’ you could have a realistic chance to see gains as high as 400% in the coming years. At the same time, your dividend is likely to continue to grow every year, like clockwork.
“In fact, here’s an estimated schedule of when you could expect the next eight payments from the ‘Boomer Index.’
Aug. 23, 2013
Nov. 22, 2013
Feb. 21, 2014
May 16, 2014 *Expected payment increase
Aug. 22, 2014
Nov. 21, 2014
Feb. 20, 2015
May 22, 2015 *Expected payment increase”
So what’s the story? Well, as you might have imagined — the “Boomer Index” is not an index at all, it’s just a catchy term to use so you can keep the investment “secret”. What Scheidt is teasing is a specific stock, a company in the health care business that has consistently raised its dividend for decades and that he thinks will do spectacularly well with this new wave of retirees.
Here’s some more to give you the flavor of the pitch:
“You see, the ‘Boomer Index’ is 100% linked to the health care industry, by design.
“And baby boomers, by hook or by crook, are projected to pay over $29 trillion on health care expenses over the next 20 years. The “Boomer Index” stands to collect a large share of that money.
“According to a new study by Fidelity[9] Benefits Consulting, a baby boomer couple turning 65 can expect to pay $220,000 in out-of-pocket medical costs during the rest of their lifetime.
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just click here...“In addition, Medicare will spend roughly another $193,500 for each boomer….
“Yes, a leading position in the health care sector has allowed the “Boomer Index” to raise its dividend every year since 1962…
“But the new surge of aging[10] seniors is so massive it could lead to record-breaking profits.
“Remember, boomers have only been turning 65 for the last two-and-a-half years. We’re at the front of this massive wave that will last for two decades, at least.”
So we know that it’s not actually an index, and it’s some kind of specific investment that benefits from increases in health care spending — how about some specific clues? Here are a couple of ’em:
“his company is uniquely positioned to profit from the surge in health care spending driven by aging boomers.
“In fact, I believe this investment is the single best way to play the health care boom for maximum potential profits – both this year, and for the next two decades.
“This company has a hand in almost every single aspect of the health care industry.
“It’s the fastest-growing drug maker in the world by sales, with 10 crucial new drugs expected to come onto the market in the next few years.
“Pharmaceutical sales are up 12% in the last year alone….”
And some more little tidbits for you:
“… the company’s biggest driver of growth in the next few years is medical devices….
“The company I call the ‘Boomer Index’ is the largest medical device maker in the world. That’s in addition to selling prescription drugs at a faster rate than anyone else.”
So those are our clues — what, then, is the “Boomer Index?” Toss all that blather into the Mighty, Mighty Thinkolator and we learn that this is … Johnson & Johnson (JNJ). No relation to yours truly, unfortunately.
JNJ has certainly been one of the bedrock dividend growth stories of the last 50 years — they have indeed raised the dividend every year since 1962, and while it was a fairly expensive dividend-growth stock with good underlying profit growth for many of those years, it went through a process of catching up with its valuation over the last 8-10 years, becoming almost a high-yield stock and mostly trading in the $60-70 range for the past decade (ignoring the financial crisis, from which it recovered quickly) before going on a good run again in just the last year or so (the stock is up around $90 now).
This latest run up in the stock follows a couple challenging years for JNJ — this is the company that probably set the standard for crisis response with the Tylenol cyanide poisoning murders 30 years ago, but they had a rough go with product safety and contamination concerns and recalls recently, particularly with Motrin and their children’s OTC medicines. So maybe it’s just that the market took a couple years to adjust to those relatively discrete manufacturing problems and they’re now giving JNJ more credit for their basic underlying growth — or maybe it’s that the improvement of their pharmaceutical pipeline or their medical device development has the market anticipating growth again.
Those several years of mistakes and recalls also had at least some influence on Warren Buffett[11], whose Berkshire Hathaway had been a major holder of JNJ for several years — and Buffett sold Berkshire’s JNJ stake down to a very low level in 2012, so Berkshire is no longer a substantial JNJ shareholder. That’s not necessarily an indication that it’s a bad investment — the stock has done very well since he sold it — but it indicates the level of frustration that investors had in recent years with the company’s mistakes and, not coincidentally, flat stock performance until just this year.
So that’s the backdrop — but it doesn’t tell us much about where the company is going, assuming that they finally solve the nagging recall problems with Motrin and other products and avoid disasters with their drugs and medical devices (surgical mesh, implants, etc.) This year brought a sharp increase in earnings for this gigantic company — when you see a $250 billion company boost earnings by better than 10-20% that’s notable, and JNJ has been doing even slightly better than that for much of this year. Analysts see that tapering off quite a bit, with estimates that they can grow earnings by 6-7% per year for the next five years, so if you think they’re right then you’d probably be wary of paying 20X earnings for this behemoth of a company. I think Scheidt’s prediction that JNJ can increase by 400% over the next several years, or even decade, is pretty wildly optimistic … but that doesn’t mean it will be a bad investment.
Here’s what the Morningstar[12] analyst says about them, just for another perspective:
“We continue to hold a strong outlook for J&J’s recently launched drugs, including diabetes[13] drug Invokana, cardiovascular drug Xarelto and HIV[14] treatment Endurant. Also, recently launched cancer drug Zytiga is holding off competition better than we expected. Overall, we expect annual sales growth will average 3% during the next 10 years, as strong growth in new pipeline drugs and the Synthes acquisition should offset some patent losses in the pharmaceutical division and near-term weakness in the consumer division. We expect operating margins to improve during the next five years as the company faces few patent losses on high-margin drugs and cost-remediation efforts in the consumer group should dissipate.”
The PE is about 20, the dividend is just under 3% and will probably keep growing (they’ve been hiking the dividend annually by somewhere between 5-10% for many years, most recently bumping the quarterly payout from 61 to 66 cents), and they pay out just a little more than half of their earnings as dividends[15] and have excellent free cash flow generation so they do have plenty of room to spend on R&D and keep up with those dividend increases, even if they have a couple more soft years at some point.
That doesn’t sound terrible to me, it just sounds a bit expensive. The analyst at Morningstar headlined his recent report, “Strong new drug launches and improving consumer manufacturing are setting J&J up for solid growth” … but he also put a $90 “fair value” price on the stock, and that’s right where it stands today. The company does have an unusual level of diversity in its sales, with drugs, medical devices, and consumer health products each a strong component of revenue (pretty close to equal reliance on the three when it comes to sales), so that does get them probably closer to being “Boomer Index” than any of the other very large healthcare firms.
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Thanks for the unravel here, Travis. Once again, well done.
I am a charter member of the Boomers having just turned 65 this past July. We boomers have and will continue to be the main drivers of our economy for many years to come. Some of what we will be contributing to ecomomic growth will be good. Some will cause major problems. Good for healthcare companies, leisure industry, etc. Bad for major entitlement programs and the workers that are funding them for us today like Social Security and Medicare. Someday politicians are going to have to face the fact that those programs mut be reformed and adjusted to reflect reality. There will be a storm of hellfire and brimstone for them from AARP and other Senior organizations.
JNJ is a core holding for me and will remain so. Yep, I’d be a lot happier buying around $70 instead of $90, but it’s that dividend and the growth of it I’m after, not capital gain. I’ll find growth opportunity elsewhere.
Now, Travis, get out there and find us that actual “Boomer Index” ETF or fund. I bet one such thing exists that focuses on companies like JNJ which prosper based on the needs and wants of Boomers. I’d toss some money to that idea. You find it for us, I’ll buy it. Deal?
Thanks!
The Blind Squirrel
Jim Skelton
Not to be picky Jim, but the “charter members” of the Baby Boomer club were born in 1946 nine months or more after the end of the war in June 1945. Being born in 1948 does not quite make the Charter Membership cutoff :-)).
Not every soldier got back from the war at the same time, and a woman can only be pregnant once every nine months. 😉 My grandfather, being an engineer, had as much to do after the war, helping to rebuild Japan, as during the war. His wife had 6 army brats from 1947-1963: which ones were baby boomers? IMO the answer is all of them. The problem is the number of children my grandmother had vs. the number of her grandchildren (average of 2.5).
As ominous as baby boomer retirement is for our entitlement programs, China is going to have a much more catastrophic baby boomer problem than the United States because of its one child policy. I wonder what the Boomer Index in China would be?
Matt
Sorry but you missed the point. Yes they are all Baby Boomers. Charter Members usually refers to the original first group which would be the 1946 births….
What we frequently overlook in discussions of this nature is productivity increase. Over a generation of twenty years, yield per person is up by a larger factor than the reductionin reproduction rate.
JNJ is on my dividend grower list, will fill out that position soon. Best regards and thanks for the great article.
What stocks are being hyped in the Investment U “Urgent Message for all Gun Owners” on 3-D companies?
Maureen – I am not sure about the Investment U thesis but the main companies in the 3D printing space at the moment are DDD 3 D systems Inc, SSYS Stratasys and PRLB Protolabs according to secveral commentators. It is worth watching all three of them for a while to see how they thrive. It may take some time for them to really stand out because their share prices have been quite volatile but in the longer term – maybe something. This is educational only of course, not a recommendation.
I thought JNJ when I read the title–huge and diverse solid healthcare player equally weighted in three large areas and with solid dividends. It is my biggest blue chip holding at about 6% of my portfolio. Like Jim, I have looked for a Boomer ETF and think it’s a great idea–wish I had the big bucks and positioning to start one! I’ve improvised on my own by holding individual stocks and several healthcare ETFs: UNH (health insurance), Mckesson, Zimmer, Valeant, IBB (biotech ETF), PSCH (small company health ETF) and PJP (pharmaceutical ETF). Like Jim, my biggest speculative holding is also the small biotech company Stellar Biotech.
I don’t have any leisure area holdings currently–any good ideas here for solid growth? Any other ideas to capitalize on the aging of the developed world’s population?
Thanks all, David
What is this “retirement Insurance” that Bob Wiedemer is touting?
Looks like Bob Wiedemer touts gold, precious metals mining stocks and he touts some magic potion for buying bonds. These all would be hedges against a stock crash. I’m not going to pay for his hocus pocus, but I bet I’ve got it nailed. Personally, I’m not a big fan of any of these although gold does hedge against ones stock holdings. Cramer talks of gold as insurance against big stock dips as well.
About what I thought. There are just too damned many financial newsletters out
there and most of them are just rip offs.
Thats why we love Gumshoe…..it weeds the overgrown garden.
Johnson & Johnson, JNJ, is really a lazy stock-pickers choice for benefiting from boomers’ golden ponds years. It is after all a maker of lots of drugs and nostrums, sold to kiddies and adolescents and working stiffs, not just to retirees. Think Band-Aids. It is getting into medical devices but that is not its present main business.
If you want a stock for the aged you should think of Zimmer Holdings, ZMH, maker of dental and body orthopedic and reconstruction devices which would be a growth market among the boomers-to-come. I happen to own it although it has nothing to do with http://www.Global-Investing.com which I write. ZMH is a red-white-and-blue USA company. Being an American most of my portfolio is safe growing US stocks, not the foreign ones my newsletter is about.
I also have another one which is an ADR but I am not sharing it with the gumshoe gang because when I offer a free stock tip here they turn on me.
Vivian, ironically, I believe Zimmer was a spin off from JNJ years ago. JNJ is not just getting into medical devices–it’s about 30% of the company right now. JNJ is a solid, diversified American company with great worldwide exposure as well. I wouldn’t call it a lazy person’s investment, more like a smart person’s investment. I agree with Travis that it is a bit pricey right now, but that is due to it’s many positives. It’s a great stock for those who want growth and income with low volatility.
Oh poor Vivian: Its not the ‘free’ stock tips that offend, nor any sensible comment……..its the sneaking your own web address in (again), trying to promote your own paid for services. As a marketing strategy, its a disaster…… Gumshoe is possibly the worst place on the internet to tout for new customers. We’ve all been sold a pup before; somehow we’ve managed to find our way to the only oasis in a cyber world full of B…Sh1t. Even if yours is the real deal, freebie piggy backing is not the honourable way and this is definitely not the right place…………
My mistake–Zimmer spun off of Bristol Myers Squibb. I held both JNJ and BMY at that time, hence my confusion.
Baby Boomer stocks – every walk into a casino? They are full of pot bellied old farts throwing away their life savings.
JNJ may also have a winner with an investment in 23andMe.
http://www.23andme.com/about/corporate/
I’m still awaiting results. What do you think? Please leave your comments about it.
Ah yes, another sluggish behemoth (can anyone say Microsoft?) that just lolls along tossing out scraps of dividends because they are “a family company.” Speaking of Microsoft and the wonder glowing job performance of Steve Ballmer, the man who purportedly tripled earnings during his tenure as CEO, may anyone explain why the stock did nothing for 10 years aside from treading water?
It depends upon your investment objectives Gregory: if you want a slow, steady performer with low volatility then JNJ is a great choice. Investors who still want some growth along with a dividend will love JNJ over time.
If you want higher risk/potential reward then buy something like Stellar Biotech (SBOTF) or Clearsign Combustion (CLIR).
Besides JNJ being a big company, comparisons to Microsoft are weak. JNJ is in a whole different industry and one that promises excellent growth in coming years and decades. A well run company, beautifully positioned globally and in a guaranteed growth industry–not a bad play at all.
Care facility reits for aging boomers would seem like a good choice?
Woof woof Dutchdog….Im with you. Wouldnt it be ironic to turn a profit by owning some shares in the care home you’re dribbling in. The longer you stay, the richer you’d get.
Regarding health care facilities, I’ve been watching SBRA (Sabra) reit for the past year. Never purchased, and it’s down now. It seems interesting to me. I don’t quite understand the downside for it. My guess would be that rising interest rates would kill it. Comments please.
Rising interest rates are a fear for almost all current-yield investments, whether it’s bonds or REITs or others. If there’s a perception of little dividend growth, investors fear that the dividend may not be able to keep up with rising interest rates (therefore, “risk free” assets like Treasury Bonds might see their coupon payments rise to be high enough that they look like better and safer income investments than REITs) … plus, almost all such investments are levered up with corporate debt or commercial mortgages, so if interest rates rise considerably their operating costs rise. When the market is rate-driven, as it has been this year, then fears about those rates drive almost all the relatively conventional income equities to move almost in unison.
Typical !!!….you can take the self employed man out of the office, but you can never take the office out of the man, even when they go on holiday. Get back to the sun tan cream Travis….we need you refreshed. You’ve left us in capable hands, and divorces are v expensive.
Agree with you Travis. Although rising rates are in the news every day, dividend stock holders feel protected and shrug the news off, largely due to the fact that we’ve been in a falling rate environment for over thirty years. The artificial zero interest rate environment we’re coming out of is unprecedented in U.S. history, and the unintended consequences of it ending could be very tumultuous for interest rate sensitive dividend payers, especially utilities and REITS which not only compete with bonds but also depend on financing for infrastructure and acquisitions, respectively. Dividend stock holders beware.
As a new recruit to the blogosphere I would like to share my recent Book Club meeting, this month we had the theme of aging not a specific book, thus we chose random books provided by our very tall and very erudite librarian Bill. My choice was titled Eternity Soup, it covered various aspects of the Aging discussion, I thought the chapter titled the “Innovative Bestiary” should be a stock StockGumshoe read if you need to follow the latest pursuits. It was more fascinating to hear the responses to other books in regard to what this thing called aging well actually is. One older gentleman presented a title “The Youth Pill” where by the good doctor author sufficiently got his smart juices running by telling it as it is in regard to all those unnecessary procedures and tests that are foisted on the unsuspecting and suitably insured folks. Generally the take away message is that you need to be true to your self, leave no regrets, become love, live the moment and give more than you take. I don’t think the market is going to make a squillion with this advice.
Maybe upping the price on the Mormon Tabernacle Choir recordings, organic bones for your broth and how you can get some young people into your life. Investment in Barnes and Noble for the real books? Now that would be contrarian.
Baby boomers ‘ investment strategies are poised to continue evolving from a focus on accruing assets to turning accumulated savings into a dependable, life long income stream — a potential boon for shares of health care REIT s and other dividend-paying defensive stocks .
Probably not good timing right now for health care type REITs due to the rising interest rates (real or imagined), but I will likely add some to my portfolio in 2014 or 2015. If you are more into buy and hold then I would just wait until all the Fed maneuvering settles down at bit (probably early 2014) and buy and hold then. Like JNJ, if you are in it for five years you will do just fine (unless the whole market tanks with some catastrophe like in 2008–but even then you will be hurt less than many other stock investors). Happy and wise investing everyone.
Regarding Reits in the health field, I recently took a small position in SNH.
I am not touting his Reit, it seems like a decent conservative play.
When Obama care is fully implemented, with thousands of baby boomers
entering Medicare and Medicaid, hospitals and long term care will be in greater demand. A well diversified company, paying a decent, sustainable dividend,
at a fair price valuation. Time will tell as always.