Is New Zealand Telecom the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if New Zealand Telecom (NYSE: NZT  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 New Zealand Telecom.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(1.0%)

fail

 

1-Year Revenue Growth > 12%

(6.6%)

fail

Margins

Gross Margin > 35%

64.0%

pass

 

Net Margin > 15%

7.4%

fail

Balance Sheet

Debt to Equity < 50%

108.7%

fail

 

Current Ratio > 1.3

0.79

fail

Opportunities

Return on Equity > 15%

15.3%

pass

Valuation

Normalized P/E < 20

12.39

pass

Dividends

Current Yield > 2%

11.8%

pass

 

5-Year Dividend Growth > 10%

(9.0%)

fail

       
 

Total Score

 

4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

A score of 4 is far from perfect, although New Zealand Telecom does have a few things going for it. The stock has gotten renewed attention because of the opening of the iShares MSCI New Zealand ETF (NYSE: ENZL  ) .

High dividend yields have attracted many to the telecom sector, and New Zealand Telecom's yield is among the highest of the high. The problem, though, is that the dividend has been going in the wrong direction. While domestic telco CenturyLink (NYSE: CTL  ) has seen explosive dividend growth in the past five years, New Zealand Telecom has actually seen payouts shrink significantly since 2005.

Just as AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) have faced significant questions about growth given the increasing obsolescence of their legacy landline networks, New Zealand Telecom has sought growth from wireless and broadband network development. Yet the New Zealand government recently expressed doubts about whether it would choose New Zealand Telecom as a partner in creating a national broadband network for the country. Without that growth opportunity, the company's fortunes could continue to decline as they have over the past several years.

Keep searching
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.

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True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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