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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 Aflac (NYSE: AFL ) 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 Aflac.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.1%||fail|
|1-Year Revenue Growth > 12%||11.9%||fail|
|Margins||Gross Margin > 35%||28.0%||fail|
|Net Margin > 15%||10.8%||fail|
|Balance Sheet||Debt to Equity < 50%||27.6%||pass|
|Current Ratio > 1.3||0.56||fail|
|Opportunities||Return on Equity > 15%||22.7%||pass|
|Valuation||Normalized P/E < 20||12.91||pass|
|Dividends||Current Yield > 2%||2.1%||pass|
|5-Year Dividend Growth > 10%||21.4%||pass|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Scoring five points out of 10, Aflac falls into the middle of the pack. But with much of the insurance industry struggling through tough times, the well-known provider of accident and health insurance policies has a lot to quack about.
Watching all of its commercials, you might not realize that Aflac does the bulk of its business in Japan, writing policies on employees at nearly 90% of top Japanese companies. Its business there is highly profitable, as one in four families has an Aflac policy, and the long length of its written policies gives the company a chance to buy longer-term investments with its float.
Where Aflac shines, though, is in its return on equity. Without having huge debt, Aflac has a big competitive advantage over Unum (NYSE: UNM ) , Assurant (NYSE: AIZ ) , and CNO Financial (NYSE: CNO ) , none of which comes close to passing the 15% test, let alone matching Aflac's showing.
At the same time, Aflac trades at an attractive valuation and pays a nice dividend that has grown substantially over time. Although revenue growth and margins fall short of our desired levels, they're markedly higher than most of its competitors.
Aflac may not be the perfect stock, but you may want to take a closer look. Even if the duck annoys you, the company's results may make you want to shout its name, too.
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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