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Is Walgreen 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 Walgreen (NYSE: WAG  ) 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 Walgreen.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 9.8% fail
  1-Year Revenue Growth > 12% 6.4% fail
Margins Gross Margin > 35% 28.2% fail
  Net Margin > 15% 3.1% fail
Balance Sheet Debt to Equity < 50% 17.3% pass
  Current Ratio > 1.3 1.60 pass
Opportunities Return on Equity > 15% 14.5% fail
Valuation Normalized P/E < 20 15.66 pass
Dividends Current Yield > 2% 1.99% fail
  5-Year Dividend Growth > 10% 21.4% pass
  Total Score   4 out of 10

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

Walgreen's score of 4 certainly doesn't come close to perfect. But even though the drugstore retailer's steady pace of growth doesn't necessarily score big points on our scale, it makes its stock attractive to conservative investors looking for stability.

Walgreen's chief competitors are rival drugstore companies CVS Caremark (NYSE: CVS  ) and Rite Aid (NYSE: RAD  ) . While Rite Aid has struggled to keep its place among the top 3 drugstores, Walgreen has posted decent growth recently, especially in its bread-and-butter prescription sales business.

Still, the company faces challenges. Big-box retailers Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) have made strong in-roads into prescription sales and obviously offer a wider variety of other goods. But Walgreen's customer-centric retailing innovations, in which it aims to provide health and daily living goods on top of its pharmacy offerings, appear to be bearing fruit. And in fact, the company sees slower store growth as a positive, allowing its employees to focus on providing customer service.

Walgreen may not look like the perfect stock, but it's got a lot going for it. If you're interested in investing in this tough industry, you could certainly do much worse than Walgreen.

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 Walgreen 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. The Fool owns shares of Wal-Mart, which is a Motley Fool Inside Value choice and a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days. 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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