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 New Zealand Telecom
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 New Zealand Telecom.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (1.9%) | Fail |
| 1-Year Revenue Growth > 12% | (3.0%) | Fail | |
| Margins | Gross Margin > 35% | 63.8% | Pass |
| Net Margin > 15% | 3.3% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 118.7% | Fail |
| Current Ratio > 1.3 | 0.67 | Fail | |
| Opportunities | Return on Equity > 15% | 6.8% | Fail |
| Valuation | Normalized P/E < 20 | 14.95 | Pass |
| Dividends | Current Yield > 2% | 7.1% | Pass |
| 5-Year Dividend Growth > 10% | (12.7%) | Fail | |
| Total Score | 3 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
When we looked at New Zealand Telecom last year, it managed to do slightly better in posting a score of four. Falling returns on equity are responsible for the downgrade, but shares have soared in recent months as the company considers some strategic options.
Investors around the world have gotten used to getting large dividends from the telecom industry, and New Zealand Telecom is no exception. Even though the payout has actually fallen in recent years, the yield still stands at a healthy 7.1%. That far exceeds what American telcos Verizon
One thing that has gotten shareholders excited about New Zealand Telecom is a proposed spinoff of the company's Chorus infrastructure unit. Under the split, Chorus would build New Zealand's fiber network, along with the domestic wireline business and exchange buildings, while the surviving telecom unit would get its mobile network and the company's international businesses. The move mimics how Verizon sold much of its hardwire business to Frontier Communications
After the split, which analysts see gaining approval by the end of the year, New Zealand Telecom will be a different business. By putting much of its debt onto Chorus' shoulders, the surviving entity will be leaner and more maneuverable. That could get the stock back on the road 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.
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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
