Has Procter & Gamble Become the Perfect Stock?

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 and then decide whether Procter & Gamble (NYSE: PG  ) 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.
  • Moneymaking 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 Procter & Gamble.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

1.1%

Fail

 

1-year revenue growth > 12%

(0.4%)

Fail

Margins

Gross margin > 35%

50.2%

Pass

 

Net margin > 15%

15.5%

Pass

Balance sheet

Debt to equity < 50%

49.7%

Pass

 

Current ratio > 1.3

0.98

Fail

Opportunities

Return on equity > 15%

17.5%

Pass

Valuation

Normalized P/E < 20

26.18

Fail

Dividends

Current yield > 2%

2.9%

Pass

 

5-year dividend growth > 10%

10.2%

Pass

       
 

Total score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Procter & Gamble last year, the company has jumped by 2 points, more than making up for its 1-point loss from 2011 to 2012. Margins and debt levels improved a bit, and the stock has soared nearly 20% in the past year, with much of those gains coming very recently.

For years, Procter & Gamble treaded water even as its consumer-goods peers saw substantial improvements. In particular, Unilever (NYSE: UL  ) and Kimberly-Clark (NYSE: KMB  ) focused strongly on emerging markets to try to drive growth, and they did a better job than P&G of capturing revenue growth. Kimberly-Clark is smaller and therefore might be expected to grow more quickly, but with Unilever being comparable in size, P&G's failure to match up is more troubling.

Now, though, the stage appears set for a wave of new innovation from P&G. Its new Tide Pods product has performed well lately, leading the company to introduce it to other markets. With one success under its belt, P&G's new-product teams should gain confidence as they make new attempts to add to the company's prestigious list of billion-dollar brands.

Unfortunately, P&G took a big hit earlier this week when Venezuela devalued its currency. The company held what had been worth $1.3 billion in local Venezuelan currency and therefore will take a charge of as much as $275 million to reflect the devaluation, cutting core earnings by a penny per share this quarter and $0.03 per share for full-year 2013. Clorox (NYSE: CLX  ) had already warned that a potential devaluation could take $0.05 to $0.10 per share off its full-year earnings, highlighting the risk that all global players face in consumer goods.

For P&G to improve, it needs to keep pushing its earnings higher to bring its valuation down to more manageable levels. If new product launches go well, then higher sales could also get P&G closer to perfection.

Keep searching
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.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Click here to add Procter & Gamble to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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