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 Dean Foods Co (NYSE:DF) 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 Dean Foods.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (0.6%) | Fail |
| 1-year revenue growth > 12% | (1.5%)* | Fail | |
| Margins | Gross margin > 35% | 25.4% | Fail |
| Net margin > 15% | 1.5% | Fail | |
| Balance sheet | Debt to equity < 50% | 664.5% | Fail |
| Current ratio > 1.3 | 1.67 | Pass | |
| Opportunities | Return on equity > 15% | 68.6% | Pass |
| Valuation | Normalized P/E < 20 | 18.70 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes. * Adjusted to reflect WhiteWave IPO.
Since we looked at Dean Foods last year, the company has picked up a point, with return on equity rebounding sharply. The stock has seen great performance as well, climbing more than 35% over the past year.
Facing a huge debt load, Dean Foods Co has made some big strategic moves recently to try to shore up its balance sheet. By making an initial public offering of a stake in its The WhiteWave Foods Co (NYSE:WWAV) organic foods division in October, Dean took advantage of the segment’s high growth rate and set the stage for a full spinoff of Dean’s remaining 80% stake in WhiteWave. Then, in December, Dean sold off its Morningstar Foods business for $1.45 billion to Canada’s Saputo. The proceeds from these transactions will help Dean pay down its borrowings from their lofty levels.
