Ride the Baby Boomer Express to investment profits?

Ride the Baby Boomer Express to investment profits?

The aging boomers remain a powerful economic force. Investing in the industries they support could pay off big in the years ahead.

By Leslie Kane
Senior Editor

What's the link between Beatles records and variable annuities? Both owe their popularity to 36- to 54-year-olds, who now are more concerned with buying insurance than LPs. In fact, as the baby boom generation ages, it is turning its enormous spending power to a variety of new industries. For investors, paying attention to that trend could pay off handsomely.

"Because there are so many baby boomers, they've had a dramatic effect on everything they've touched," says Neal E. Cutler, professor of financial gerontology at Widener University in Chester, PA. "Whatever products or industries they spend on as they age are likely to do well." Boomers have caused big swings in supply and demand for everything from schools to jobs to housing.

"These folks' purchase preferences have more impact on company fortunes than the price of oil, interest rates, or politics," says Fred L. Dowd, an investment adviser in Casper, WY. "It's wise to invest in businesses likely to benefit from mass spending habits."

Other experts agree. "It's the bulge in the post-war baby population, combined with the low birth rate in the generation following, that gives you the boomer effect," says A. Gary Shilling, an economist in Springfield, NJ. "It's not strong enough to be the only reason to invest in a company, but it plays a role."

You can best take advantage of the boomer effect by looking to companies that boomer spending habits will favor within the next 10 years, says Kimon Passios, an associate portfolio manager with Pinnacle Associates, an investment advisory firm in New York City. "With changes in technology and the variables in society, it's too difficult to predict beyond that," he says.

Companies need more than middle-aged consumers' dollars to prosper, however, so it's equally important to choose holdings with solid fundamentals, new products in the pipeline, and strong growth prospects. Here are some sectors and sound stocks that seem likely to get an extra kick from the postwar generation.

"May you stay forever young"
—Bob Dylan

"This generation is obsessed with staying healthy and looking good," says Cutler. "Middle-aged adults grew up reading nutrition labels on cereal boxes and are committed to maintaining their health. Companies that make pharmaceuticals, medical devices, and other health and beauty products can do well."

As boomers are beset by age-related ailments, companies with appropriate treatments will have a ready clientele. The generation known for drug-taking in the '60s will be back at it, but this time they'll be using medicines for conditions such as incontinence and hypertension. Among businesses that seem likely to gain:

Alza. Based in Mountain View, CA, Alza manufactures systems that enable drugs to be absorbed by the body over extended periods. That allows patients to take fewer doses; as a result, they're more likely to stick with their regimens. "The prospect of superior results from better compliance makes those drugs the treatment of choice for doctors and patients," says Passios.

The company's technology is already used in many popular products, including Acutrim, NicoDerm CQ, and Sudafed 24 Hour.

"Alza recently got approval to market Ditropan XL in a one-a-day pill," says Passios. "Ditropan treats overactive bladder, which will affect increasingly more boomers as they get older." Other promising products, while not limited to middle-agers, include a drug for prostate cancer, an insulin for patients with type II diabetes, and a medicine to treat attention deficit-hyperactivity disorder.

Alza, founded in 1968, saw sales grow about 23 percent in the last year. Its share price has increased from an average of 22 in 1995 to about 36.* Passios expects Alza to hit 55 within 12 to 16 months.

Amgen. An industry that barely existed when postwar babies were young will help them—and others—combat all kinds of ailments. "One of the most significant products Amgen will bring to market is NESP, used to treat anemia that occurs during chronic renal failure," says A. Marshall Acuff, equities strategist with Salomon Smith Barney in New York City. "NESP is more efficient than Epogen, which is currently used to treat that condition." Moreover, Amgen is seeking FDA approval of NESP for the treatment of anemia in cancer patients as well. And it will sell NESP directly outside the US—unlike Epogen, which it sells abroad through another company that gets royalties for the sales.

"Amgen also has a number of drugs in the pipeline," says Acuff. "Some will be major and meaningful, others may not be as big. But put them together over the next few years, and you'll get superior growth from Amgen."

The company's 1999 earnings were 24 percent higher than in 1998. The stock's price has catapulted from an average of about 10 in 1995 to about 59.

Eli Lilly. If America had an official national pill, Prozac would be a contender for the title. Lilly's top product, Prozac, has been used by more than 35 million people since its introduction in 1988. The company's other major pharmaceuticals include Humulin, Axid, and many animal health products. In 1999, Eli Lilly's sales increased 8 percent, to more than $10 billion worldwide.

Lilly's newer drugs are moving briskly, too. Sales of Evista, a one-a-day pill to prevent osteoporosis, were up 126 percent for 1999 over 1998. Those of Zyprexa, an antipsychotic drug, rose 31 percent over the same period, and revenues from Gemzar, a cancer-treatment drug, climbed 49 percent. The company is also testing a new drug to treat hepatitis C.

"While the industry faces some patent expirations over the next several years, we believe Eli Lilly holds one of the most promising pipelines to support future growth," says Passios. Wall Street seems to agree: Lilly's share price has risen from an average of about 20 in 1995 to its current 63.

"Give me money, that's what I want"
—the Beatles

It's panicville, as boomers realize that time left to build a retirement stash is dwindling. "Boomers are saving and investing, and variable annuities have become a big growth area," says Mark Armbruster, an equities strategist with Salomon Smith Barney. "People are living longer, and they fear they might outlast their savings. Purchasing a variable annuity guarantees an income stream until they pass away. Companies offering those products are likely to do well."

Life insurance companies will be big winners in the coming decade, predicts Neal Cutler, who adds that long-term care is a big worry for boomers. "I expect insurance companies to marry life insurance with long-term-care insurance," he says. "When the children are grown and life insurance is less important, the policy will convert to long-term care insurance."

Some companies to consider:

Allmerica Financial. This holding company—which had its fifth consecutive year of record earnings in 1999—owns Citizens Insurance Company of America, Hanover Insurance, and First Allmerica Financial Life In-surance Company. Allmerica's subsidiaries provide property, casualty, and life insurance, as well as financial products and services for risk management and investments.

Since going public in 1995, Allmerica has had average annual operating earnings growth of 29 percent. Management plans to focus on cost-cutting, in an effort to improve profitability. The Asset Accumulation division's business is robust, with a 30 percent year-to-year increase in fees from variable annuities and variable life insurance through the third quarter of 1999.

In another move to hike sales and, hence, revenues, the company is offering its agents the chance to earn a bonus commission on one new financial product. Allmerica Financial has also launched a new system for handling variable annuities, which should lower operating expenses, reduce product development time, and improve customer service.

Allmerica's share price, which averaged about 26 in 1995, is now about 41.

"The company is a good buy," says Marshall Acuff. "We feel its price is reasonable, and we expect growth that will bring strong share price gains."

Axa Financial. Death and taxes are certain, but boomers are trying to add financial security in old age to that list. Axa, the parent holding company for The Equitable Life Assurance Society of the US and Equitable Variable Life Insurance, is right there to help—and to reap the rewards.

Equitable's sales of life insurance, annuities, and mutual fund shares grew last year, and first-year annuity sales through the wholesale channel increased 23 percent. Axa Financial has become aggressive about ex-panding its reach: It has entered agreements to offer competing products through its own sales force, in exchange for access to other companies' distribution networks.

Axa Financial's asset management and new fee-based financial planning services are also grabbing profits. Axa owns about 70 percent of Donaldson Lufkin Jenrette, one of the nation's largest investment banking and securities firms. DLJ is growing, too; its rank shot from 11th to 5th in global merger and acquisition assignments over the past year.

"This company is benefiting from the growth in financial products and is targeting retirement products, such as annuities," says Passios. "Financial services will swell from the influx of baby boomer dollars." Axa's share price has grown from an average of 11 in 1995 to its current 28, and it could climb as high as 40 within 16 months, Passios says.

The Hartford Financial Services Group. Once foes of materialism, boomers now scurry to protect their property. That's a boon to The Hartford Financial Services Group, a leading provider of property and casualty insurance. Its life insurance operations rank among the fastest growing in America, based on increases in assets. One of Hartford Financial Services' new-millennium goals is to provide personal auto and homeowners insurance quotes online.

Hartford is also expanding internationally. It offers insurance and, in some cases, investment services in Australia, Brazil, China, India, and other countries in Europe, Latin America, and Southeast Asia. The company is looking to acquire other firms or develop joint ventures with additional partners in local markets.

Revenues decreased about 10 percent in 1999 from the prior year, largely due to the sale of one of Hartford's European companies. On the upside, Hartford had record sales for group term life insurance, and introduced automobile insurance for high-risk drivers in six new states.

"The company is aggressive, and we think it has the structure and solid fundamentals to do well," says Acuff. "We feel it's not overvalued, which gives share price a greater opportunity to grow."

"Fun, fun, fun . . ."
—the Beach Boys

Boomers will have plenty of free time over the next few decades, thanks to early retirement and voluntary decreases in workload. Travel and entertainment will help fill the void.

A Gallup survey showed that today's workers are most looking forward to travel when they retire.

Here are some firms that might benefit:

Carnival. Carnival operates Carnival Cruise Lines and owns or has interests in other such outfits, including Holland America Line and Cunard Line.

Already the world's largest and most profitable cruise company, Carnival promises to keep growing. It plans to build new ships and increase berth capacity, to construct and operate a new cruise ship terminal in California, and to implement price increases. "We expect these moves to boost earnings per share over the next few years," says Acuff. "Demand for cruises will also increase, especially among older people, and cruises are more frequently becoming family events."

Carnival's already on a roll. Its average share price has doubled since 1995, from about 12 to 23.

Media General. Stiff joints rebel against shoveling snow, and many aging boomers long for a move to a warmer climate. That's a plus for this Southeastern company with interests in the region's print, broadcast TV, and interactive media. The firm publishes 25 daily newspapers and operates 14 network-TV stations.

"The Southeast will remain a popular destination for retirement," says Passios. "Many middle-aged adults from the East Coast prefer Florida weather or want to be near parents who have moved there. We expect Media General to benefit from the demographic shift, but we consider it a very undervalued company, regardless."

Cost controls should help rev up profits in the publishing division. And the company is on a rampage to boost its Internet presence. Media General Financial Services data will be offered through Quicken.com, Intuit's personal finance Web site, and Media General has developed strategic alliances with Dow Jones Interactive, Microsoft, and other major financial Web sites.

Media General's share price has grown from an average of 32 in 1995 to about 52, and it could go as high as 70 in 2001, says Passios. This year, earnings should benefit from additional revenues from the broadcast TV sector, as a result of political races and the 2000 Olympics.

Park Place Entertainment.Elvis lives—or, at least, his impersonators do—in venues owned by the world's largest casino gambling company, Park Place Entertainment. Casino gambling has gained popularity over the last decade—and not only in the most obvious places. In Laughlin, NV, for instance, over 30 million people—median age 57—visited in 1998 to gamble, up from 21 million in 1990.

Park Place Entertainment's gaming revenue growth in the Atlantic City Hilton and Bally's Park Place has outpaced that of its peers. The company owns 17 land-based and riverboat casinos in Australia, Mississippi, Nevada, New Jersey, and Uruguay, including Bally's, the Flamingo, and the Hilton. In its first year as an independent company, Park Place Entertainment acquired Caesar's World, and it recently opened the Paris Las Vegas Casino Resort.

"Park Place Entertainment has the best management in the business," says Passios. "We see the supply and demand balance in the industry improving, and the company's share price should grow." The stock price is now about 10; it started trading in January 1999, the year the company went public, at about 6 per share. Its share price could increase by 50 percent within 18 months, Passios predicts.

Seagram. Baby boomers spend heavily on entertainment and particularly on music, says Passios. And while Seagram may be best known for liquor, nearly 70 percent of its revenues come from entertainment.

Seagram owns Universal Studios, which produces and distributes movies, television shows, and home video products and recorded music. It also operates theme parks and retail stores.

Seagram's Universal Music Group is the world's leading music company, with wholly owned record operations or licensees in 59 countries. Its labels include Motown and Decca, and it has recording deals with artists such as Elton John and Luciano Pavarotti. The Universal Studios Recreation Group is also strong, and in 1998, it became the first US entertainment company to develop a recreation site in China. Universal plans to boost its e-commerce for music, allowing consumers to sample music on the Web, order it, and have it delivered electronically.

The wine and spirits business is also robust, with brands such as Absolut, Chivas Regal, and Martell. Seagrams' share price is bubbling, too; it averaged 33 in 1995 and is now about 62. Passios expects it to reach 80 within 16 months.

"The music group and the emphasis on Internet commerce and entertainment will have a major effect on company revenues and investment return," Passios predicts.

*All prices in this article are through March 15, 2000. Where applicable, historical prices have been adjusted to reflect the value of subsequent stock splits.

Companies that boomers may favor

What if you had bet on the boomers 10 years ago?

Ten years ago, Medical Economics first advised readers to invest in industries that would benefit from baby boomer spending. (See "Making money on the demographics of the future," June 4, 1990.) Back then, the boomers were mere children of 26 to 44. Our experts pointed to the health care, financial services, and leisure sectors, as well as quality goods, and companies affected by a shrinking labor pool.

Investors who took that advice could have beaten the market. For the 10 years from Jan. 1, 1990, to Jan. 1, 2000, the S&P 500 Stock Index had annualized returns of about 18 percent. Not bad, but during the same period, the drug, financial services, and leisure sectors had annualized returns of 29, 34, and 30 percent, respectively.

Many of the individual stocks we recommended a decade ago have done well, too. Of the 20 companies our experts chose, 10 no longer exist in the same form. Turner Broadcasting Systems became part of Time Warner, Neutrogena was purchased by Johnson & Johnson, and several others have had equally happy endings. One recommendation, La Petite Academy, is no longer a public company.

Of the remaining 10, six had 10-year annualized total returns exceeding 15 percent. The biggest winners were Medtronic (34.2 percent), Merrill Lynch (31.7 percent), and Tiffany (23.4 percent). The only clunker was Kelly Services, with a 10-year annualized total return of 0.3 percent.

A mutual fund that follows boomers

So far, AIM Dent Demographic Trends Fund, founded in June 1999, is the only equity portfolio that bills itself as following baby boomer purchases.

The fund is modeled after the investment philosophies of Harry S. Dent Jr., author of The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History. Dent maintains that consumer spending patterns help drive stock market performance. He expects boomer dollars to generate an unprecedented surge in spending in the next several years.

"We look at the forest and the trees of the investment landscape, and capitalize on the potential baby boomer spending wave," says Edgar M. Larsen, a portfolio manager with the fund. Computer software, health care, financial services, and entertainment will be robust, thanks in part to boomer spending.

The Aim Dent Demographic Trends Fund had over $207 million in assets as of Dec. 31, 1999. Three-month returns, as of the same date, were 38.7 percent. Class A shares of the fund have a 5.5 percent front load.

Will the market nosedive when the boomers retire?

In about 10 years, the oldest boomers will reach Social Security retirement age, and many will start to withdraw money they've stashed in 401(k) plans. Some folks fear that a nationwide run on retirement accounts will cause a market decline.

Not to worry, says Michael Goldston, an investment adviser with Cambridge Equity Advisors in Brentwood, TN. Boomers barely saved until retirement loomed in the immediate future, Goldston says, but younger people have already started investing, which will keep money pouring into the market. "I've never seen so many 20- and 30-year-olds buying stocks," Goldston says. "There are far more people in that age group trading and investing than there were 20 years ago."

Boomers aren't likely to yank huge amounts out of their retirement funds, Goldston adds. "New retirees will not be eager to pay taxes on their investment gains, so people will limit the amount of money they take out at one time," he says. "Also, people expect to live for 20 or 30 more years in retirement. They'll need their money to keep growing, so they'll keep it in stocks."

Kimon Passios, an associate portfolio manager with Pinnacle Associates in New York City, also feels that any selling pressure will be limited. "We believe that most individual investors are holding large-cap stocks, and any short-term impact will be felt by those stocks, as opposed to small and mid-sized companies. Overall, however, this is not something we're concerned about."

But according to economic adviser Harry S. Dent Jr., the stock market will lose steam around 2009. By then, most boomers will have passed their peak spending years. "Predictable personal and family spending reaches a maximum at around age 46 or 47 for the head of the household," says Dent. "The one fundamental factor that drives the boom-and-bust cycles of our economy over time isn't a matter of politics, interest rates, trade deficits, or the strength of the dollar. It's consumption: how the average family spends money in predictable patterns over time."

When the US stock market drops, real estate, Treasury bonds, and foreign equities will hold the best investment promises, says Dent.

Leslie Kane. Ride the Baby Boomer Express to investment profits?.

Medical Economics

2000;7:75.