Has Procter & Gamble 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 and then decide whether Procter & Gamble 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.
- Moneymaking 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 Procter & Gamble.
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%
6 out of 10
Since we looked at Procter & Gamble last year, the company has jumped by 2 points, more than making up for its 1-point loss from 2011 to 2012. Margins and debt levels improved a bit, and the stock has soared nearly 20% in the past year, with much of those gains coming very recently.
For years, Procter & Gamble treaded water even as its consumer-goods peers saw substantial improvements. In particular, Unilever and Kimberly-Clark focused strongly on emerging markets to try to drive growth, and they did a better job than P&G of capturing revenue growth. Kimberly-Clark is smaller and therefore might be expected to grow more quickly, but with Unilever being comparable in size, P&G's failure to match up is more troubling.
Now, though, the stage appears set for a wave of new innovation from P&G. Its new Tide Pods product has performed well lately, leading the company to introduce it to other markets. With one success under its belt, P&G's new-product teams should gain confidence as they make new attempts to add to the company's prestigious list of billion-dollar brands.
Unfortunately, P&G took a big hit earlier this week when Venezuela devalued its currency. The company held what had been worth $1.3 billion in local Venezuelan currency and therefore will take a charge of as much as $275 million to reflect the devaluation, cutting core earnings by a penny per share this quarter and $0.03 per share for full-year 2013. Clorox had already warned that a potential devaluation could take $0.05 to $0.10 per share off its full-year earnings, highlighting the risk that all global players face in consumer goods.
For P&G to improve, it needs to keep pushing its earnings higher to bring its valuation down to more manageable levels. If new product launches go well, then higher sales could also get P&G closer to perfection.
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 Procter & Gamble Become the Perfect Stock? originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark, Procter & Gamble, and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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