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 (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%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Williams has an interesting history. For more than a century, the company has been involved in the energy industry, but it took some of its unused pipelines to create fiber optic networks that it has long since divested. Currently, the company is focused on midstream assets, with its general partnership stake in Williams Partners (NYS: WPZ) , and it has a place among the 15 stocks in the Dow Jones Utilities.
Pipeline investors who are used to seeing higher yields from Enterprise Products Partners (NYS: EPD) and Kinder Morgan Energy Partners (NYS: KMP) should keep in mind that Williams isn't structured as a master limited partnership. As a result, Williams shareholders can reap the benefit of their 3%-plus dividend yield without worrying about a mass of complex paperwork come tax time. Moreover, although it hasn't come close to the streak of 17 consecutive quarters in which Alliance Resource Partners (NAS: ARLP) has raised its dividend, Williams has committed to an aggressive game plan for higher payouts over the next few years.
Unfortunately, conditions haven't been ideal for Williams lately. With margins on natural gas liquids starting to compress, Williams saw its profits fall. As more producers shift away from cheap dry gas toward oil and liquids production, that trend may well continue.
For Williams to improve, its best course is to aim for slightly higher returns on equity, perhaps at the expense of slightly more balance sheet leverage. Short of finding ways to build margins, Williams may well struggle to get much closer to perfection in the near future.
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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The article Has Williams Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Alliance Resource Partners and Enterprise Products Partners. 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.
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