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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Empire District Electric (NYSE: EDE ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Empire District Electric.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||8.4%||Fail|
|1-Year Revenue Growth > 12%||10.2%||Fail|
|Margins||Gross Margin > 35%||52.1%||Pass|
|Net Margin > 15%||9.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||107.3%||Fail|
|Current Ratio > 1.3||1.62||Pass|
|Opportunities||Return on Equity > 15%||7.9%||Fail|
|Valuation||Normalized P/E < 20||15.97||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||3 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With just three points, Empire District Electric hasn't energized its shareholders lately. The company suffered greatly from recent devastation in its home territory, but things may not be as bad as some think.
At first glance, Empire looks like any other electric utility company -- except, perhaps, for its dividend yield of zero. Until recently, the company paid a dividend of $1.28 per year, giving it a trailing yield of 6.8% at today's prices. The reason for the disparity is that Empire is cutting its dividend temporarily in response to the huge tornado that hit Joplin, Mo., last month. With 8,000 to 10,000 structures destroyed, the company's revenue and load will fall, and the company will also need to pay for repairs to its infrastructure. That news sent shares plummeting.
But the company expects to suspend its dividend only through the end of 2011, with plans to restore a $1 dividend next year. That would give the shares a yield well above 5%, which puts it in line with Duke Energy's (NYSE: DUK ) yield and ahead of both Southern Co. (NYSE: SO ) and Exelon (NYSE: EXC ) .
For now, Empire may not look much like a perfect stock. But if you can wait a few months before getting paid, you may well have an opportunity to get in on a future stream of income at a relative bargain.
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 Empire District Electric to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.