Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Procter & Gamble (NYS: PG) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Procter & Gamble.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.0%||Fail|
|1-Year Revenue Growth > 12%||7.0%||Fail|
|Margins||Gross Margin > 35%||49.5%||Pass|
|Net Margin > 15%||11.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||51.4%||Fail|
|Current Ratio > 1.3||0.79||Fail|
|Opportunities||Return on Equity > 15%||15.6%||Pass|
|Valuation||Normalized P/E < 20||20.19||Fail|
|Dividends||Current Yield > 2%||3.3%||Pass|
|5-Year Dividend Growth > 10%||11.2%||Pass|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Procter & Gamble last year, the consumer products giant has lost a point. Higher materials costs have contributed to a weaker net margin for the company.
Procter & Gamble is well-known as one of the largest players in consumer goods. With 24 brands that produce $1 billion or more in revenue, the company dominates the world market, with especially strong sales growth in emerging markets.
But lately, the company has seen some headwinds. In its most recent quarterly report, P&G said that profits declined by nearly half, due largely to a goodwill writedown. The company blamed poor economic conditions in western Europe as a significant contributor to the decline and downgraded its full-year earnings guidance.
Fortunately, P&G isn't alone in its challenges. Clorox (NYS: CLX) has had to raise its prices to offset rising raw materials costs, but its profit margins have also narrowed. Colgate-Palmolive (NYS: CL) and Unilever (NYS: UL) are also dealing with the same factors, and given Unilever's proximity to Europe, it especially will face a double-whammy from slow economies and high costs.
For P&G to get back toward perfection, it needs to focus on bolstering its core of premium products, as well as building up its brand to try to maintain its market share -- and take business from competitors. Even if that strategy doesn't pay off right away, it will in the long run.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
P&G is a strong stock for the long haul, but it's not your only choice. Learn about three more promising stocks for the long haul in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Clorox. Motley Fool newsletter services have recommended buying shares of Procter & Gamble and Unilever. 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.
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