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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 Dominion Resources (NYSE: D ) 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 Dominion Resources.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(2.2%)||Fail|
|1-Year Revenue Growth > 12%||(5.3%)||Fail|
|Margins||Gross Margin > 35%||31.1%||Fail|
|Net Margin > 15%||16.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||141.8%||Fail|
|Current Ratio > 1.3||1.22||Fail|
|Opportunities||Return on Equity > 15%||22.4%||Pass|
|Valuation||Normalized P/E < 20||19.39||Pass|
|Dividends||Current Yield > 2%||4.5%||Pass|
|5-Year Dividend Growth > 10%||6.2%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Dominion only manages a score of 4. But despite the relative quiet right now, this utility has interesting plans for the future.
Utilities have been a pretty sleepy industry lately, and Dominion is no exception. But if you put Dominion up against some of its competitors, you'll notice a couple interesting things. Compared to Southern Company (NYSE: SO ) , Exelon (NYSE: EXC ) , and Duke Energy (NYSE: DUK ) , the Virginia-based Dominion has much narrower gross margins than its peers. But Dominion makes more of that revenue fall through to net profit than the other three, with the only net margin that meets our 15% test. Dominion's returns on equity also top the list, in part because of the higher levels of debt on its balance sheet than its competitors.
But Dominion isn't standing still. The company recently made an agreement with PPG Industries (NYSE: PPG ) to buy an option on West Virginia land owned by PPG in order for Dominion to build a natural gas plant. With proximity to the gas-rich Marcellus shale area, the project would dovetail well with gas extraction there.
Like most utilities, Dominion pays an attractive dividend. You're never going to see breakneck growth from the company, and its balance sheet is a bit more leveraged than some other utility names. For income-seeking investors, Dominion may be worth a closer look than its score here would suggest.
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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