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 Emerson Electric (NYSE: EMR ) 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 Emerson Electric.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||4%||Fail|
|1-Year Revenue Growth > 12%||11.4%||Fail|
|Margins||Gross Margin > 35%||39.6%||Pass|
|Net Margin > 15%||10.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||49.9%||Pass|
|Current Ratio > 1.3||1.48||Pass|
|Opportunities||Return on Equity > 15%||21.7%||Pass|
|Valuation||Normalized P/E < 20||23.64||Fail|
|Dividends||Current Yield > 2%||2.3%||Pass|
|5-Year Dividend Growth > 10%||9.8%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Emerson Electric manages to get halfway to perfection with a score of 5. But over the past year, investors have recognized some of its future prospects -- and so far, they've mostly liked what they see.
Emerson is in the power business, but it neither generates electricity of its own nor maintains a massive transmission network to deliver it from power plants to customers. Instead, it helps businesses manage their power needs more efficiently. From large nuclear power plants and wind-energy farms all the way down to the small motors you may well find in your household appliances, Emerson has an impressive breadth of offerings. And with better returns on equity and higher margins than competitors Siemens (NYSE: SI ) and Honeywell (NYSE: HON ) , Emerson is maintaining its strong position as well.
Perhaps most impressive is Emerson's history of paying dividends. With 54 straight years of dividend hikes, Emerson is among the elite of the elite. And unlike fellow Dividend Aristocrat Consolidated Edison (NYSE: ED ) , whose annual dividend hikes tend to be relatively small, Emerson's dividend increases are substantial, nearly eclipsing the 10% threshold we look for.
Emerson isn't an exciting stock. But for income investors seeking dependable dividends and slow but steady growth, Emerson may be exactly what you're looking for.
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.