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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 Bemis (NYSE: BMS ) 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 Bemis.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||7.7%||Fail|
|1-year revenue growth > 12%||39.1%||Pass|
|Margins||Gross margin > 35%||18.5%||Fail|
|Net margin > 15%||4.4%||Fail|
|Balance sheet||Debt to equity < 50%||73.4%||Fail|
|Current ratio > 1.3||2.47||Pass|
|Opportunities||Return on equity > 15%||12.3%||Fail|
|Valuation||Normalized P/E < 20||15.66||Pass|
|Dividends||Current yield > 2%||2.8%||Pass|
|5-year dividend growth > 10%||5%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of just four, Bemis doesn't carry the perfection you might expect from a Dividend Aristocrat. The stock has a long history of healthy payouts for shareholders, but low margins and lackluster long-term growth has held it back.
Bemis is best-known for its 28-year streak of increasing its dividend annually. That qualifies it for inclusion on the Dividend Aristocrats list, an exclusive group of just a few dozen stocks that have raised dividends consistently for a quarter-century or longer.
As is the case with many dividend payers, Bemis' business isn't all that glorious. The company creates packaging for consumer products, including food and health-care packaging. It stands out from most of its competitors, including Sonoco Products (NYSE: SON ) and Smurfit-Stone Container (which RockTenn (NYSE: RKT ) recently acquired ), by virtue of its emphasis on flexible packaging materials.
Despite its strong dividend history, the company has struggled to grow. Its recent revenue bump comes largely from its acquisition of Alcan Packaging Products from Rio Tinto (NYSE: RIO ) two years ago. Like rival Avery Dennison (NYSE: AVY ) , whose dividend cut in 2009 ended its own 32-year streak of rising payouts, Bemis' margins are razor-thin, and relatively high debt levels threaten the company's growth prospects.
For investors who are particularly interested in dividends, Bemis has a proven pedigree. But a perfect stock needs a reasonable opportunity to grow, and that's something the packaging company lacks right now. Until it can identify a plan for growth going forward, Bemis will fall short of perfection.
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 Bemis 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.