Is Williams 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 whether Williams Companies (NYSE: WMB  ) 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 that 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 Williams.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% (5.2%) fail
  1-Year Revenue Growth > 12% 4.6% fail
Margins Gross Margin > 35% 26.0% fail
  Net Margin > 15% 3.3% fail
Balance Sheet Debt to Equity < 50% 111.6% fail
  Current Ratio > 1.3 1.59 pass
Opportunities Return on Equity > 15% 3.8% fail
Valuation Normalized P/E < 20 14.16 pass
Dividends Current Yield > 2% 2.5% pass
  5-Year Dividend Growth > 10% 23.2% pass
       
  Total Score   4 out of 10

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

Williams' score of 4 shows that it clearly isn't perfect. But even with oil prices rising steadily, natural gas has been stuck in the doldrums, with the United States Natural Gas ETF (NYSE: UNG  ) down nearly 50% in just the past year. Along with producers Chesapeake Energy (NYSE: CHK  ) and Devon Energy (NYSE: DVN  ) , Williams' stock has been stuck there, too.

But Williams has taken steps to restructure itself recently, in an attempt to improve its financial condition. Earlier this year, it sold most of its pipeline assets to the master limited partnership Williams Partners (NYSE: WPZ  ) , which is 77% owned by Williams. The move allowed Williams to pay down debt; now, Williams is more focused operationally on exploration and production. With a reasonable valuation and a solid dividend, Williams does have some positive attributes to offer shareholders.

Despite its low prices, there's still plenty of interest in natural gas as an investment. When gas prices rise, Williams will be in a great position to see its financial condition improve significantly, bringing it a lot closer to perfection.

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.

Want to own the perfect stock? Click here to read our special report, 5 Stocks the Motley Fool Owns -- And You Should Too.

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. Chesapeake Energy is a Motley Fool Inside Value choice. The Fool owns shares of Devon Energy. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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  • Report this Comment On October 13, 2010, at 4:41 PM, hawgparlor wrote:

    still a bunch of slimy lieing cutthroat basturds need to clean out atlanta div. office never seen so many land rep.s that will say and do anything to trick landowners out of their properties.

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