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 BCE (NYSE: BCE ) 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 BCE.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||2.1%||Fail|
|1-Year Revenue Growth > 12%||7.9%||Fail|
|Margins||Gross Margin > 35%||39.4%||Pass|
|Net Margin > 15%||12.0%||Fail|
|Balance Sheet||Debt to Equity < 50%||100.5%||Fail|
|Current Ratio > 1.3||0.62||Fail|
|Opportunities||Return on Equity > 15%||20.7%||Pass|
|Valuation||Normalized P/E < 20||13.45||Pass|
|Dividends||Current Yield > 2%||5.4%||Pass|
|5-Year Dividend Growth > 10%||9.2%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at BCE last year, the company has picked up a point. Strong returns on equity may look promising, but they likely came from a big jump in the Canadian telecom giant's debt-to-equity ratio.
BCE has the same appeal that telecom stocks AT&T (NYSE: T ) and Verizon (NYSE: VZ ) have in the U.S. -- namely, bringing solid dividends to shareholders through its provision of telecommunications services including voice, data, and Internet. Just as AT&T and Verizon have moved from being stable, slow-growth companies providing utility-like landline services to focus more on high-growth wireless services, so is BCE dealing with unprecedented new opportunities.
Those opportunities, though, come with competitive pressures. Rival Rogers Communications (NYSE: RCI ) has seen huge subscriber growth as it builds on its advantage in the smartphone market. That leaves both BCE and fellow national network operator TELUS (NYSE: TU ) scrambling to improve their wireless networks and also find ways to distinguish themselves from their peers.
One way to stand out is with strong content. Last month, BCE announced that it would buy Quebec media company Astral in a $3.4 billion deal. The move will allow BCE to expand its French-language content library and continues a string of content-related acquisitions, including its ownership of a stake in the Montreal Canadiens and a pending deal to pick up an interest in the Toronto Maple Leafs as well.
For BCE to keep moving forward, it needs to secure the valuable content that will be the coin of the realm for telecom and media companies going forward. With smart strategic moves already under its belt, BCE looks poised to capitalize on the continuing worldwide mobile revolution.
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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