Has Franklin Resources Become the Perfect Stock?

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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 Franklin Resources (NYS: BEN) 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 Franklin Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%6.2%Fail
 1-Year Revenue Growth > 12%15.7%Pass
MarginsGross Margin > 35%44.9%Pass
 Net Margin > 15%26.6%Pass
Balance SheetDebt to Equity < 50%23.0%Pass
 Current Ratio > 1.37.87Pass
OpportunitiesReturn on Equity > 15%21.3%Pass
ValuationNormalized P/E < 2016.63Pass
DividendsCurrent Yield > 2%0.9%Fail
 5-Year Dividend Growth > 10%14.9%Pass
    
 Total Score 8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Franklin Resources last year, the stock has kept its eight-point score. Healthy markets have boosted assets under management, which is a key element of success for a mutual fund manager.

Franklin Resources is the name behind the Franklin, Templeton, and Mutual Series fund families. With a wide variety of stock and bond funds, the company is fairly well diversified and hasn't suffered from an exodus of assets that more stock-centric firms have seen. Along with Legg Mason (NYS: LM) and Invesco (NYS: IVZ) , Franklin uses closed-end funds to help boost its asset base, with the added benefit of having those assets locked up in a way that regular mutual funds don't allow. The fixed-share nature of closed-ends has undoubtedly helped Legg Mason, Invesco, and Franklin keep captured assets that might otherwise have fled during the financial crisis.

The big question, though, is whether Franklin will move into the ETF realm. Already, mutual fund companies BlackRock (NYS: BLK) and State Street (NYS: STT) have jumped into ETFs in a big way. With Pimco's recent release of an ETF version of its Total Return fund, Franklin could have an open door to create ETF counterparts to its own successful mutual funds. The challenge, though, is that Franklin has traditionally relied on commission-based advisors to sell its funds, which collect a sales load. ETFs would give investors an end-run around those advisors, potentially crippling its current distribution channel.

Boosting the company's tepid 1% dividend yield would be an obvious step toward perfection. But unless the bull market continues, revenue growth isn't likely to accelerate enough to give this stock a full 10-point score in the future.

Keep searching
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.

Franklin Resources isn't the perfect stock, 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 hereto add Franklin Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of BlackRock. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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