Profit From The Largest Generation In History: 2 Companies Boomers Love

Joseph Hogue's picture

Thursday, October 9, 2014 - 12:00pm

by Joseph Hogue

Geo-political tensions, historic monetary programs and a global economy that has yet to show us much have all helped to quiet the drone of worries over the effect from the coming retirement of the boomer generation.

But those worries are still there.

Almost daily I read a new article warning about how the exodus of 76 million boomers could bring the next market meltdown.

Will they withdraw all their money from stocks, favoring the safety of cash or bonds, leading to an abrupt selloff in equity prices?

Will reduced spending lead to decades of subpar economic growth and disappointing returns?

While I wouldn’t count myself as one of the doomsayers, there is good reason to be fearful. Seniors are becoming an increasingly large proportion of the U.S. population, those 65 years and older will account for 19% of the population in 2030 from just 13% in 2010.

Researchers at the University of Missouri found that tolerance for risk decreases approximately 2% for each year above the median age of 47 years old. This would back up the belief that boomers could switch their investment allocations from stocks to safer investments over the coming years.

Data from the Bureau of Labor Statistics also show that seniors spend about 19% less than the rest of the population. That could mean a tough road ahead for an economy that books 70% of activity from consumer spending.

Before you panic and sell out of stocks, you may actually be able to profit from the coming shift in spending. While overall spending is lower for seniors, there are some categories that see increased spending.

If you are afraid of the coming boomer-ocalypse, buy what they are buying.

Drugs & Home Improvement

I have used the most recent consumer spending data from the bureau to create the table below, highlighting key differences in senior-spending. The table also shows the percentage share of expenditures to each item. While the absolute amount of dollars that seniors spend on a category may decrease as a result of lower income, watch for significant changes in percentage share for confirmation of stronger or weaker consumer trends when the boomers retire.

Healthcare as a beneficiary should come as no shock, but I was surprised that medical services did not show a benefit. While insurance providers may see much higher spending, profits will likely be limited from higher payouts. Drugs look to be the biggest beneficiary from the category.

I was also surprised at how much more is spent on home maintenance and repairs by the senior group. It makes sense though. The bureau data also shows that 81% of those 65 years or older own their homes as opposed to ownership of just 64% for the general population.

Two Of My Favorites In Drugs & Home Improvement

Pfizer, Inc. (NYSE: PFE) has been hunting for a large acquisition ever since its $118 billion bid for AstraZeneca Plc (NYSE: AZN) was rejected in May; however, the firm has strong growth potential from its own pipeline. AZN was recently approved for fast-track status on its investigational vaccine candidate, Clostridium Difficile, currently in Phase 2 clinical development. While a mega-acquisition has eluded the company, Pfizer has had good success buying drug portfolios and recently closed a $635 million deal for a portfolio of vaccines from Baxter International, Inc. (NYSE: BAX).

StreetAuthority’s Marshall Hargrave provided one of the best arguments for Pfizer last February. Besides its renewed focus on high-growth segments, the company has paid out the most cash to shareholders (as a percentage of enterprise value) of any major drugmakers. Shares pay a dividend yield of 3.6% and the company has repurchased $10.9 billion in shares over the last twelve months.

The Home Depot, Inc. (NYSE: HD) is the world’s largest home improvement retailer with a strong contractor following as well as in the do-it-yourself group. According to HIRI/Global Insight, total home improvement product sales in the United States are expected to increase 4.9% in 2014 to $303 billion, with a stronger 5.8% increase expected in 2015.

For years analysts have been predicting a mass senior exodus away from home ownership and to senior living facilities. I do not see it happening. Data from the Bureau of Labor Statistics show that only 5% of the 65-plus population currently lives in skilled care facilities. Nearly 90% of seniors say they want to stay in their homes as they age. Now factor in the potential for reverse mortgages and in-home care to allow for seniors to stay in their homes, and I doubt you will see much of a change in home ownership.

Shares of Home Depot pay a respectable dividend of 2% and the company has repurchased $7.7 billion in shares over the past year.

Risks to Consider: Demographic shifts, and the subsequent change in spending, happen slowly over more than a decade. Poor company-specific fundamentals in the near-term will not help shares even with higher spending coming over the long-term. Changing spending patterns should only be one factor in your decision to buy a specific stock.

Action to Take --> Look for long-term support in industries like drugs and home improvement from changing spending patterns and be careful of investments in industries that may see reduced consumer spending from the aging population.

Both Home Depot and Pfizer have respectable dividend yields and are repurchasing shares -- two of the three criteria that make up a “Total Yield” stock. Since 1982, the highest Total Yielders returned an average of 15% per year. Last year, this group of stocks more than doubled the S&P 500's return. To learn more about the Total Yield strategy, click here.

Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of PFE in one or more of its “real money” portfolios.