Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
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 General Mills (NYSE: GIS ) 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 General Mills.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.5%||Fail|
|1-Year Revenue Growth > 12%||7%||Fail|
|Margins||Gross Margin > 35%||37.1%||Pass|
|Net Margin > 15%||9.9%||Fail|
|Balance Sheet||Debt to Equity < 50%||100.6%||Fail|
|Current Ratio > 1.3||0.78||Fail|
|Opportunities||Return on Equity > 15%||22.8%||Pass|
|Valuation||Normalized P/E < 20||18.01||Pass|
|Dividends||Current Yield > 2%||3.2%||Pass|
|5-Year Dividend Growth > 10%||11.1%||Pass|
|Total Score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at General Mills last year, the food giant's score has stayed the same. Yet while some small declines in profitability raise some concerns, the company's dividend continues to be attractive.
The big trend among food companies lately has been to break up into smaller pieces. Kraft Foods (NYSE: KFT ) plans to split its global snack business from its North American grocery business in the hopes of unlocking some shareholder value and allowing each segment to compete better against its more focused peers. Similarly, Ralcorp spun off its Post Holdings (NYSE: POST ) cereal company, which is a direct swing at General Mills and its peers. Even Sara Lee (NYSE: SLE ) is joining in on the fun, splitting off its coffee and tea division from the food products in its lineup.
Part of that trend may be due to some improvement in the industry as the impact of rising food prices starts to moderate. Kellogg (NYSE: K ) posted a nice profit last quarter, even before news came that it had bought up the Pringles division of Procter & Gamble, which should add to its strength going forward.
General Mills doesn't appear to be splitting up anytime soon. But things haven't been so positive for it lately. Last month, the company lowered its guidance for the coming quarter. Even as General Mills starts to reap benefits from its buyout of yogurt-maker Yoplait, associated costs will weigh on the bottom line, at least in the near term.
General Mills has the potential to reach perfection, but it needs to keep executing in a competitive market. Only by continuing to innovate in the face of aggressive rivals can General Mills find the growth it needs to boost its brand recognition and make further inroads into fast-growing emerging markets.
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 the best investments from the rest.
General Mills isn't perfect yet, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.
Click here to add General Mills to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.