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 Verizon (NYSE: VZ ) 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 Verizon.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.6%||Fail|
|1-Year Revenue Growth > 12%||5.1%||Fail|
|Margins||Gross Margin > 35%||59.0%||Pass|
|Net Margin > 15%||2.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||58.4%||Fail|
|Current Ratio > 1.3||1.03||Fail|
|Opportunities||Return on Equity > 15%||12.2%||Fail|
|Valuation||Normalized P/E < 20||11.46||Pass|
|Dividends||Current Yield > 2%||4.6%||Pass|
|5-Year Dividend Growth > 10%||4.2%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Verizon last year, the company hasn't been able to improve on its three-point score. But shareholders are quite pleased with the stock's 20% gain over the past year.
Verizon continues to be a dividend powerhouse, vying with rival AT&T (NYSE: T ) for the top spot among Dow stocks. Despite the need for huge capital investments to support and build wireless networks, Verizon maintains far stronger free cash flow than its relatively modest net income would suggest.
But the telecom industry has transformed into a growth-centered business, and one key to success is to secure enough wireless spectrum to operate efficiently. Both AT&T and Verizon have taken steps to build up their spectrum assets, but their respective proposals have raised controversy. The failed merger with T-Mobile actually cost AT&T spectrum, which T-Mobile claimed as part of its break-up fee. But Verizon's deal to buy spectrum from a consortium of cable companies including Time Warner Cable (NYSE: TWC ) and Comcast has gotten similar regulatory attention on concerns about the impact that co-marketing deals between the cable operators and Verizon would have on Sprint (NYSE: S ) and other competitors.
One place where Verizon is looking to capture more money is in its service plans. The company announced earlier this month its plan to move from limited-minute phone plans to "Share Everything" plans with unlimited voice and texting, combined with a tiered-pay structure for data. The move will make it marginally cheaper for high-use customers at the expense of cheaper plans that offered fewer minutes and could pay dividends for both Verizon and joint-venture partner Vodafone (Nasdaq: VOD ) .
To keep moving forward, Verizon needs to continue investing in the technology advances that help distinguish its networks from its rivals'. If it can do that, then Verizon is well-placed to keep benefiting from the smartphone revolution.
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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