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 Altria (NYSE: MO ) 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 Altria.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.9%*||Fail|
|1-Year Revenue Growth > 12%||(1.0%)||Fail|
|Margins||Gross Margin > 35%||53.8%||Pass|
|Net Margin > 15%||20.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||293.2%||Fail|
|Current Ratio > 1.3||1.75||Pass|
|Opportunities||Return on Equity > 15%||74.4%||Pass|
|Valuation||Normalized P/E < 20||15.27||Pass|
|Dividends||Current Yield > 2%||5.9%||Pass|
|5-Year Dividend Growth > 10%||11.2%**||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. *Figures adjusted to account for Philip Morris International and Kraft spinoffs. **Annualized dividend growth since June 2008, which was first dividend after Philip Morris International spinoff. Total score = number of passes.
When we looked at Altria last year, it had an identical score of 7. Many investors still don't feel comfortable investing in the tobacco giant, but it has delivered solid dividends and relative stability for years.
Altria's streamlined strategy of focusing solely on its U.S. tobacco business has thus far done well. While Kraft Foods (NYSE: KFT ) has had to deal with food inflation, Altria and the internationally focused Philip Morris International (NYSE: PM ) have been able to concentrate on tobacco production.
But not everything has gone Altria's way in the past year. With revenues actually declining by 1%, the company lags the sales growth that competitors Reynolds American (NYSE: RAI ) , Lorillard (NYSE: LO ) , and Vector Group (NYSE: VGR ) have posted. In addition, new laws forcing tobacco companies to use bigger warning labels on cigarette packs and advertisements will take effect in late 2012. That could drive smokers toward products from Star Scientific (Nasdaq: CIGX ) and force Altria to try to get still more profits from a potentially dwindling number of customers.
Nevertheless, with a modest rise in share prices even before considering a dividend yield remaining near 6%, Altria has given shareholders a perfect combination of income and capital gains over the past year. With a ton of debt and facing those growth headwinds, it may never get a perfect 10, but Altria has been a strong stock for years and should continue to do well.
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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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."