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 Western Union (NYSE: WU ) 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 Western Union.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.0%||Fail|
|1-Year Revenue Growth > 12%||6.1%||Fail|
|Margins||Gross Margin > 35%||44.0%||Pass|
|Net Margin > 15%||21.4%||Pass|
|Balance Sheet||Debt to Equity < 50%||348.9%||Fail|
|Current Ratio > 1.3||2.04||Pass|
|Opportunities||Return on Equity > 15%||169.1%||Pass|
|Valuation||Normalized P/E < 20||13.60||Pass|
|Dividends||Current Yield > 2%||2.3%||Pass|
|5-Year Dividend Growth > 10%||104.8%||Pass|
|Total Score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Western Union last year, the company has picked up a point. Despite a 5% rise in its stock price, the money services company has continued to raise its dividend and now yields more than 2%.
Catering to the millions of people in the U.S. who don't have bank accounts has become a huge business, and Western Union has capitalized on that opportunity. With a network covering more than 200 countries and including hundreds of thousands of locations, Western Union makes it easy to send money around the world and stands atop the industry, with competitor MoneyGram and its much lower transaction volume thus far lagging behind.
But innovations in electronic payment systems are threatening Western Union's dominance. With eBay's (Nasdaq: EBAY ) PayPal continuing to make inroads in electronic payments, it could soon be easier and cheaper for Western Union customers to send money via the Internet rather than relying on physical locations. Moreover, Visa (NYSE: V ) and MasterCard (NYSE: MA ) will continue to try to participate in innovations like the smartphone-based payments that Sprint (NYSE: S ) and other wireless network providers are working on.
Moreover, banks are coming up with new ways to entice the unbanked through prepaid cards and other products. Regions Financial (NYSE: RF ) is just one of many banks suggesting prepaid cards as a bank-account alternative, especially in light of new debit-card regulations that don't apply to prepaid products.
For Western Union to improve, it needs to find new ways to innovate and grow while still holding onto its core international money transfer business. That may prove to be a tall order, but between its attractive valuations and decent dividends, Western Union should have a long future ahead of it.
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.
Western Union is an interesting financial play, but among big banks, we think there's only one that's built to last. Find out about it in the Fool's latest special report on the banking industry; it's yours free with our thanks for visiting the Motley Fool.
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