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 Dr Pepper Snapple (NYSE: DPS ) 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 Dr Pepper Snapple.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||4.7%||Fail|
|1-Year Revenue Growth > 12%||4.9%||Fail|
|Margins||Gross Margin > 35%||58.4%||Pass|
|Net Margin > 15%||9.4%||Fail|
|Balance Sheet||Debt to Equity < 50%||115.7%||Fail|
|Current Ratio > 1.3||0.98||Fail|
|Opportunities||Return on Equity > 15%||22.8%||Pass|
|Valuation||Normalized P/E < 20||13.51||Pass|
|Dividends||Current Yield > 2%||3.7%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Dr Pepper Snapple started paying a dividend in Dec. 2009. Total score = number of passes.
Since we looked at Dr Pepper Snapple last year, the drink-maker scored the same four points. Although the company continues to see rather anemic sales growth, it has rewarded shareholders with yet another dividend increase.
Dr Pepper has long played the role of innocent bystander in the feud between Coca-Cola (NYSE: KO ) and PepsiCo (NYSE: PEP ) . What many don't know, however, is that Dr Pepper has licensing deals with both of its larger rivals, and has worked to add McDonald's (NYSE: MCD ) to the list, making its drinks available in domestic McDonald's restaurants across the country.
Dr Pepper has made some moves lately to lock in financing at great rates for years to come. Earlier this month, it replaced maturing two-year bonds with longer-maturity seven- and 10-year debt. Dr Pepper will pay higher interest rates as a result, but the switch greatly reduced its exposure to volatility in the bond market. With other companies including Teva Pharmaceutical (Nasdaq: TEVA ) and Windstream (Nasdaq: WIN ) making similar decisions to raise debt financing, Dr Pepper looks to be capturing a growing trend.
Going forward, the real question is whether Dr Pepper can boost its margins. With Coke, Pepsi, and Hansen Natural (Nasdaq: HANS ) all beating the company on net margins and returns on equity, Dr Pepper has some work to do. But with dividends having doubled in just the past two years, shareholders may enjoy owning the stock while they wait to see what happens. Dr Pepper isn't the perfect stock, but it's an interesting gamble in a popular space right now.
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."