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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 Colgate-Palmolive (NYSE: CL ) 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 Colgate-Palmolive.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||6.6%||Fail|
|1-year revenue growth > 12%||2.4%||Fail|
|Margins||Gross margin > 35%||58.6%||Pass|
|Net margin > 15%||15.2%||Pass|
|Balance sheet||Debt to equity < 50%||159.4%||Fail|
|Current ratio > 1.3||1.05||Fail|
|Opportunities||Return on equity > 15%||85.7%||Pass|
|Valuation||Normalized P/E < 20||17.54||Pass|
|Dividends||Current yield > 2%||2.8%||Pass|
|5-year dividend growth > 10%||12.8%||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Colgate-Palmolive cleans up with a good six-point score. The company hasn't exactly been setting the night on fire with its growth lately, but right now, calm stocks that can stand up in a down market have great value for defensive investors.
Colgate has a track record that proves that it can stand the test of time. For 115 years, Colgate has paid dividends on its stock, and even through the Great Depression and countless other disruptive events, the company has maintained that dividend. Moreover, recently, Colgate has boosted that dividend at a double-digit annual percentage pace.
What may surprise you, though, is that Colgate is actually the growth king in the consumer staples arena. Procter & Gamble (NYSE: PG ) and Kimberly-Clark (NYSE: KMB ) , as well as cleaning products maker Clorox (NYSE: CLX ) , have higher dividend yields, but none of them can match Colgate's sales growth rate of nearly 7% annually.
That said, Colgate faces some of the same challenges as the rest of the industry. Like Clorox, P&G, and even drink-maker Coca-Cola (NYSE: KO ) , Colgate has seen prices for its basic materials go up, forcing the company either to eat those higher costs by reining in margins or trying to pass higher prices to consumers. Fortunately, with higher net margins than its competitors, Colgate has more breathing room to make its decision.
As long as the market swoon continues, Colgate will be attractive to investors seeking a safe haven in the stock market. It's not a perfect stock, but it might well behave perfectly for conservative investors in the months and years to come.
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 Colgate-Palmolive 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.