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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 Unilever (NYSE: UL ) 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 Unilever.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||2.9%||Fail|
|1-Year Revenue Growth > 12%||11.1%||Fail|
|Margins||Gross Margin > 35%||47.9%||Pass|
|Net Margin > 15%||9.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||63.2%||Fail|
|Current Ratio > 1.3||0.92||Fail|
|Opportunities||Return on Equity > 15%||33.3%||Pass|
|Valuation||Normalized P/E < 20||18.52||Pass|
|Dividends||Current Yield > 2%||3.8%||Pass|
|5-Year Dividend Growth > 10%||6.2%||Fail|
|Total Score||4 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With only four points, Unilever isn't exactly drilling up perfection. Despite being a foreign company, Unilever makes plenty of well-known consumer products in the U.S. -- but the company hasn't been firing on all cylinders lately.
Unilever makes a wide array of food, personal care, and household cleaning products. With its Wish-Bone salad dressings and Ben & Jerry's ice cream, it goes head-to-head with Kraft Foods (NYSE: KFT ) . With Dove soap and Vaseline lotion, Unilever competes with Procter & Gamble (NYSE: PG ) and Colgate-Palmolive (NYSE: CL ) . And its bleach and surface cleaners go up against Clorox (NYSE: CLX ) and privately held SC Johnson.
The problem that Unilever faces is that like most of its competitors, it hasn't been able to produce strong growth recently. Its net margins are weak compared to the competition, and despite having a higher dividend yield than its peers, Unilever hasn't posted the double-digit dividend growth that P&G, Colgate, and Clorox have managed. With continuing worries about higher commodity prices, margins will remain an area of concern for some time to come.
Unilever's best chance at growth comes from emerging markets. But competitors are flocking there as well. Until the company can show that it can beat the competition, Unilever isn't going to be a perfect stock.
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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