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 Kinder Morgan Energy Partners LP (NYSE:KMP) fits the bill.
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 — while understanding that the master limited partnership structure introduces some wrinkles in using these factors to evaluate an MLP — let’s take a closer look at Kinder Morgan Energy Partners.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (1.3%) | Fail |
| 1-year revenue growth > 12% | 5.2% | Fail | |
| Margins | Gross margin > 35% | 47.7% | Pass |
| Net margin > 15% | 15.5% | Pass | |
| Balance sheet | Debt to equity < 50% | 149.7% | Fail |
| Current ratio > 1.3 | 0.70 | Fail | |
| Opportunities | Return on equity > 15% | 21.1% | Pass |
| Valuation | Normalized P/E < 20 | 24.39 | Fail |
| Dividends | Current yield > 2% | 5.8% | Pass |
| 5-year dividend growth > 10% | 7.4% | Fail | |
| Total score | 4 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Kinder Morgan Energy Partners last year, the company has kept its four-point score for the third year in a row. The units have been flat as well, leaving investors to rely on the MLP’s generous distributions as their sole return on their investment over the past year.
