Has Dean Foods Co (DF) Become the Perfect Stock?

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A 9% Yield From a "Strange" MLPEvery 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 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.

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