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 Philip Morris International (NYSE: PM ) 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 Philip Morris International.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||6.3%||Fail|
|1-Year Revenue Growth > 12%||8.7%||Fail|
|Margins||Gross Margin > 35%||64.3%||Pass|
|Net Margin > 15%||26.7%||Pass|
|Balance Sheet||Debt to Equity < 50%||322.2%||Fail|
|Current Ratio > 1.3||1.07||Fail|
|Opportunities||Return on Equity > 15%||133.1%||Pass|
|Valuation||Normalized P/E < 20||18.67||Pass|
|Dividends||Current Yield > 2%||3.9%||Pass|
|5-Year Dividend Growth > 10%||11.6%*||Pass|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. * 3-year growth rate. Total score = number of passes.
Philip Morris International smokes up a respectable six-point showing. Although the tobacco giant isn't seeing spectacular growth, its slowly rising sales combine with a healthy dividend to make its shares attractive to many investors.
Philip Morris International is a great example of how a corporate spinoff can work well. By packaging its international business into a separate company, Altria (NYSE: MO ) freed up Philip Morris International to thrive without the fear of liability exposure stemming from its U.S. operations. Over the three years since the spinoff, both companies have produced double-digit annual percentage share gains even in the challenging market environment.
Philip Morris International has found extremely lucrative markets overseas. With its combination of pricing power and a strong brand, the company sees much better margins than U.S.-oriented tobacco companies like Reynolds American (NYSE: RAI ) and Lorillard (NYSE: LO ) . And although Philip Morris International has to deal with international competitor British American Tobacco (AMEX: BTI ) , which pays a better dividend and trades at a cheaper valuation, it still has dominant market share.
The major blemish on Philip Morris International's record is its debt load. If the company chooses to push some of its cash flow toward reducing debt, then the tobacco leader could easily look a lot more like the perfect stock in the future.
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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