Has Williams Become the Perfect Stock?
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 Williams Companies (NYS: WMB) 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 Williams.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
When we looked at Williams last year, it did slightly better, scoring four points. A drop in the company's current ratio explains the decline and highlights some of the financial difficulties that Williams has faced recently.
Williams continues to deal with the effects of relatively low natural gas prices. Its pipeline business, most of which it sold to majority-owned subsidiary Williams Partners (NYS: WPZ) , has seen much better financial numbers than the parent company overall. That's not surprising, with pipeline and storage competitorsKinder Morgan Energy Partners (NYS: KMP) and Enterprise Products Partners (NYS: EPD) also posting good returns on equity.
What's making shareholders particularly happy is the dividend growth that Williams has produced just in the past year. The company has hiked its dividend twice in that timeframe, and its next payout will be double what it paid just this past March.
Unfortunately, the company hasn't succeeded in all of its pursuits. Williams tried to buy out Southern Union (NYS: SUG) , but it got into a bidding war with Energy Transfer Equity (NYS: ETE) and eventually lost out. Williams hasn't even gotten Energy Transfer to sell it some of Southern's assets after the merger takes place.
Despite prolonged low prices, natural gas won't fail as a long-term energy source. Eventually, demand will pick up, and when it does, Williams will be in a much better position to become a perfect stock.
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 this article was published
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