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 Aflac (NYS: AFL) 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 Aflac.
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: S&P Capital IQ. Total score = number of passes.
Since we looked at Aflac last year, the company has kept its five-point score, marking the third year in a row the company scored right in the middle. The stock has done reasonably well in a tough environment for insurance stocks, rising around 15% over the past year.
Aflac has managed to do well even as many of its fellow insurers have struggled. Hartford Financial (NYS: HIG) and Travelers (NYS: TRV) produce much lower returns on equity, due largely to their exposure to natural disasters like Hurricane Irene last year and Sandy this year.
The key to Aflac's success is its unusual line of product offerings. By doing most of its business in Japan, Aflac was in the right place at the right time to avoid much of the health-care debate that held more U.S.-focused health insurers UnitedHealth (NYS: UNH) and WellPoint (NYS: WLP) in check. Moreover, Aflac offers supplemental insurance rather than the primary coverage that UnitedHealth and WellPoint tend to offer, and the margins on certain supplemental policies can often be much higher than those on more traditional policies.
That success has helped Aflac reward shareholders more effectively. Through thick and thin, though, Aflac has managed to boost its dividends. It predictably hiked its payout recently, marking the 30th consecutive year it has done so.
For Aflac to improve, more favorable conditions in the bond market would be helpful to drive investment income and help boost profits. For the most part, though, Aflac has done a good job of enduring tough times, and the future looks bright in the long run for the 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.
The best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
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The article Has Aflac Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger owns warrants on Hartford Financial. The Motley Fool owns shares of Aflac, UnitedHealth Group, and WellPoint. Motley Fool newsletter services recommend Aflac, UnitedHealth Group, and WellPoint. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.