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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||3.2%||Fail|
|1-Year Revenue Growth > 12%||5.0%||Fail|
|Margins||Gross Margin > 35%||39.9%||Pass|
|Net Margin > 15%||9.2%||Fail|
|Balance Sheet||Debt to Equity < 50%||91.9%||Fail|
|Current Ratio > 1.3||0.80||Fail|
|Opportunities||Return on Equity > 15%||30.8%||Pass|
|Valuation||Normalized P/E < 20||18.61||Pass|
|Dividends||Current Yield > 2%||3.8%||Pass|
|5-Year Dividend Growth > 10%||5.6%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Unilever last year, the company has kept its four-point score. Like many consumer-products stocks, Unilever has held its ground but not produced spectacular performance for shareholders over the past year.
Unilever offers a wide selection of consumer goods, ranging from personal-care products like Dove soap and Vaseline to food and beverages such as Lipton tea and Hellmann's mayonnaise. With relatively stable demand for its products, Unilever doesn't suffer the same business swings as companies in more cyclical industries.
Still, Unilever has faced the same pressures as many of its peers. On the food side, Kraft (NYSE: KFT ) and General Mills (NYSE: GIS ) have seen the input costs for their products rise substantially, threatening margins. Yet while Unilever's margins have compressed somewhat, the company has also followed the same strategy as General Mills and Kraft by trying to pass through at least some of those higher costs to consumers by raising retail prices. The same conditions exist on the personal-care side of the business, where Procter & Gamble (NYSE: PG ) and Kimberly-Clark (NYSE: KMB ) have joined Unilever in trying to balance consumer price increases with maintaining demand.
So far, Unilever's response to those pressures has worked well. In its most recent quarter, the company posted sales growth of more than 8%, with an especially strong 12% jump in emerging markets. Although volume growth played an important role, higher pricing also helped results, leading the company to boost its dividend.
To improve, Unilever's best bet is to focus on its balance sheet, where debt and a weak current ratio weigh on results. Despite somewhat rich valuations, Unilever still provides ballast for big swings in your stock portfolio, and so it could make a good choice for defensively minded investors.
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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