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Is Procter & Gamble the Perfect Stock?

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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 Procter & Gamble (NYSE: PG  ) 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 Procter & Gamble.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.5% Fail
  1-Year Revenue Growth > 12% 4.9% Fail
Margins Gross Margin > 35% 51.8% Pass
  Net Margin > 15% 15.8% Pass
Balance Sheet Debt to Equity < 50% 52.5% Fail
  Current Ratio > 1.3 0.74 Fail
Opportunities Return on Equity > 15% 17.0% Pass
Valuation Normalized P/E < 20 21.40 Fail
Dividends Current Yield > 2% 2.9% Pass
  5-Year Dividend Growth > 10% 11.7% Pass
  Total Score   5 out of 10

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

Procter & Gamble clocks in with a midrange score of 5. Although the consumer products giant is well past its growth prime, it still has an attractive dividend to offer shareholders.

P&G dominates the consumer space, with household care products, personal health care, and beauty products. Its brands are household names, ranging from Gillette to Pampers to Tide. Dozens of popular brands give P&G an extremely diversified portfolio of revenue-producing products.

Domestically, Procter & Gamble has had to deal with a recession that challenged consumers' ability to pay up for premium brands. Retailers Target (NYSE: TGT  ) and Sears Holdings (Nasdaq: SHLD  ) have recently introduced private-label products at lower price points that compete for shelf space with P&G products. Yet like many other big multinationals, P&G has expanded its reach overseas by focusing on promising emerging markets for revenue growth.

Overall, P&G deserves its top-dog status in the industry. It boasts higher net margins than Kimberly-Clark (NYSE: KMB  ) and Colgate-Palmolive (NYSE: CL  ) while maintaining much lower debt levels. At current valuations, though, investors have to pay up for that commanding position by paying higher multiples to earnings, and P&G's dividend falls short of Kimberly-Clark's and Clorox's (NYSE: CLX  ) .

Procter & Gamble's mature business lines will never produce the growth necessary to give it perfect-stock status. But for income investors looking for a stalwart for their portfolios, Procter & Gamble makes a lot of sense.

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.

Click here to add Procter & Gamble to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Procter & Gamble, Clorox, and Kimberly-Clark are Motley Fool Income Investor recommendations. The Fool has written covered calls on Procter & Gamble. 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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