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 DPL (NYS: DPL) 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 DPL.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
DPL charges up a middle-of-the-road score of 5. The electric utility is on the block with a deal, but shareholders seem to think they might get something extra beyond what the buyer is offering.
DPL is the parent company of Dayton Power & Light, which is an electric utility in western Ohio. Like fellow utilities Southern Company (NYS: SO) and Exelon (NYS: EXC) , DPL presents a picture similar to many utilities: attractive dividend yields, fairly high debt loads, and reasonable (though not fantastic) growth. With DPL's revenue coming mainly from retail customers, however, its business isn't as volatile as those that have more presence in the wholesale power generation business.
That stability may well have been what AES (NYS: AES) was looking for when it made an offer to buy out DPL for $30 per share back in April. Yet the modest premium of only 9% raised the ire of shareholders who wanted to hold out for more, prompting legal investigations. In addition, analysts argue that the takeover is the cheapest all-cash deal ever for the utility sector.
At least for now, the deal seems to be on. But shareholders have bid the shares up above the $30 offer price, suggesting that they're hoping for a higher bid. In the meantime, DPL shareholders will vote at the company's annual meeting on September 23 whether to approve the deal.
DPL might have been a perfect stock if AES hadn't swooped in for the kill. Now, though, it's a merger arbitrage play, with limited upside and big potential downside if the deal falls through. Whether the DPL will reach perfection will soon rest on AES' shoulders.
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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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Southern Company and Exelon, as well as creating a covered strangle position on Exelon. 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 adisclosure policy.
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