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 Abbott Laboratories (NYSE: ABT ) 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 Abbott Labs.
What We Want to See
Pass or Fail?
|Growth||5-year annual revenue growth > 15%||11.5%||Fail|
|1-year revenue growth > 12%||13.1%||Pass|
|Margins||Gross margin > 35%||59.4%||Pass|
|Net margin > 15%||11.8%||Fail|
|Balance sheet||Debt to equity < 50%||67.7%||Fail|
|Current ratio > 1.3||1.50||Pass|
|Opportunities||Return on equity > 15%||19.7%||Pass|
|Valuation||Normalized P/E < 20||18.32||Pass|
|Dividends||Current yield > 2%||3.5%||Pass|
|5-year dividend growth > 10%||10.1%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Abbott Labs last year, the drugmaker has tacked on an additional two points to its score. Continued healthy dividend growth combined with a cheaper valuation makes Abbott look more attractive.
Abbott stands out as a mini-conglomerate of health-care segments. Like Johnson & Johnson (NYSE: JNJ ) , Abbott offers pharmaceuticals, medical devices, nutritional products, and health-care diagnostics.
But Abbott apparently isn't happy with the way that its growth depends on its blockbuster drug Humira. To remedy the situation, Abbott plans to split itself into two parts by the end of next year, with one focusing on pharmaceuticals and the other on medical devices. The move would leave the pharma stock better able to match up against Pfizer (NYSE: PFE ) -- which is contemplating its own split -- and Merck (NYSE: MRK ) , while leaving the other half of the business in a stronger position to compete against fellow device-makers like Medtronic (NYSE: MDT ) .
For long-term investors, Abbott's continuing devotion to up its dividend -- its streak now stands at 39 years -- makes a compelling reason to hold onto your shares. But it will be interesting to see how a post-split Abbott fares. The coming year should be an interesting one for the health-care giant.
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."