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 France Telecom (NYSE: FTE ) 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 France Telecom.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(2.6%)||Fail|
|1-Year Revenue Growth > 12%||(0.5%)||Fail|
|Margins||Gross Margin > 35%||42.1%||Pass|
|Net Margin > 15%||8.6%||Fail|
|Balance Sheet||Debt to Equity < 50%||140.9%||Fail|
|Current Ratio > 1.3||0.68||Fail|
|Opportunities||Return on Equity > 15%||12.5%||Fail|
|Valuation||Normalized P/E < 20||6.14||Pass|
|Dividends||Current Yield > 2%||14.5%*||Pass|
|5-Year Dividend Growth > 10%||3.1%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes. *Based on trailing dividends.
Since we looked at France Telecom last year, the company hasn't been able to improve on its three-point score. France Telecom is smack-dab in the middle of the European crisis, and after a 40% decline in its stock price, it has warned investors to expect a dividend cut in the near future.
France Telecom is one of the largest telecom operators in Europe. But as everyone knows, Europe isn't all that great a place to be right now, with the sovereign debt crisis putting a damper on economic activity across the continent. France Telecom faces saturated markets and tight regulation in many of the areas it serves, and it also has big costs on the horizon from needed technological advancements and acquisition of wireless spectrum.
Those pressures have endangered the company's lucrative dividend payout. Back in February, France Telecom said that it expected its dividend to drop from 1.40 euros per share to a range of 1.21-1.35 euros due to falling cash flow. Other telecoms have made similar moves, with Telefonica (NYSE: TEF ) cutting the cash component of its dividend by 69% and Telecom Italia (NYSE: TI ) also announcing a dividend cut.
The key for France Telecom will be to take advantage of opportunities outside Europe. Of course, competitors are moving in that direction as well, with Telefonica and Portugal Telecom (NYSE: PT ) both looking for ways to get beyond their ailing home territories on the Iberian Peninsula. Vodafone (Nasdaq: VOD ) in particular has done a good job of getting itself into a wide range of markets around the world, giving itself geographical diversification that has proven invaluable in light of Europe's crisis.
For France Telecom to recover, it needs Europe to get its house in order. Until that happens, investors will view the telecom with concern about its 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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