“The Boomer Index … best income investment in America right now” (Zach Scheidt)

By Travis Johnson, Stock Gumshoe, August 26, 2013

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 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 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 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 for his Income & Dividend Report that’s published by Contrarian Profits (that’s one of the multitude of Agora-affiliated publishers, they were called Insiders Strategy Group until a few months ago, and before that they were called Taipan). 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 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 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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“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 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, 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 analyst says about them, just for another perspective:

“We continue to hold a strong outlook for J&J’s recently launched drugs, including diabetes drug Invokana, cardiovascular drug Xarelto and HIV 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 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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