For long-term investors, portfolio management is a marathon and not a sprint. There are plenty of near-term distractions and hurdles along the way, but ultimately the focus is kept on a finish line several years if not decades ahead.
It only makes sense then to surround yourself with companies that are built for the long haul. Ones that aren’t trying to capitalize on fleeting trends but that have long-term visions for achieving growth and shareholder value.
Corporations that put themselves in the best position to succeed often have the strongest financial statements. Healthy cash flow and a sturdy balance sheet go a long way in promoting fiscal discipline and the ability to pursue growth opportunities.
Financial health can be measured in a number of ways. S&P Global Market Intelligence uses a mix of fundamental data to assess a company’s debt and interest obligations among other factors. The result is a financial health score that ranges from 1 to 100, with 100 being the most healthy.
S&P GMI’s Financial Health metric can therefore be a good way to identify winning stocks designed to go the distance. Here are three names that surge to the front of the pack.
Does D.R. Horton Have Good Fundamentals?
D.R. Horton, Inc. (NYSE: DHI) has a Financial Health score of 97. The homebuilder is not only an industry leader in terms of deliveries but boasts some of the best fundamentals in the entire consumer discretionary sector.
In the trailing 12 months, D.R. Horton’s geographically and price diversified homebuilding model generated $28.9 billion in revenue. After-tax profits of $4.5 billion translates to a healthy 16% net margin. The return on equity (ROE) of 29% is outstanding and compares favorably to main competitor Lennar which has a 23% ROE. ROE is considered a key measure of a company’s financial performance and ability to deliver shareholder value.
The current ratio, which tells us whether a company has the cash on hand to cover its near-term obligations, is very strong in the case of D.H. Horton. With a reading above 1.0 considered good, the homebuilder’s 5.8 current ratio is a reflection of its strong cash flow and modest short-term payables.
Staying on the balance sheet, D.R. Horton’s 26% debt-to-capital is solid. This ratio can be interpreted as the amount of debt, or leverage, in a company’s capital structure and is another good measure of financial solvency.
How is Bank of America’s Financial Health?
Bank of America Corp. (NYSE: BAC) also tips the Financial Health scales at 97. The nation’s second largest bank hauled in $32 billion in profits last year on $93.9 billion in revenue. No small feat in a low interest rates environment, the company is getting a major boost from its investment banking and brokerage business. And with the Federal Reserve having recently embarked on a path of rate hikes, the bank’s net interest margin is set to improve in the years ahead.
In addition to the 34% net profit margin, Bank of America’s balance sheet exudes financial strength. The 69% debt-to-capital may appear high but is at a level that is not uncommon in the banking industry. By comparison, J.P. Morgan’s debt-to-capital is 71%, a capital structure that allows it to magnify returns in a low rate environment while maintaining financial flexibility.
Nowadays, banks have their own set of regulatory metrics and requirements that tell of their financial health. The Basel regulatory framework established in the wake of the 2007-2008 financial crisis is used to assess a bank’s capital adequacy and liquidity risk. Bank of America’s Tier 1 capital ratio, a measure of its most liquid assets, is a very healthy 12.3%.
Overall, Bank of America is in excellent financial shape. Its balance sheet is well equipped to pay and raise its quarterly dividends. And with rate increases forthcoming, slow and steady will win the race if you’re a B of A shareholder.
Is S&P Global Stock a Long-Term Buy?
S&P Global, Inc. (NYSE: SPGI) has a 96 Financial Health score. This may smell of home cooking since it is the company behind the rating, but it is indeed legit. The quantitatively derived score is based on audited financial statements just as with all other companies in S&P’s universe.
The index, ratings and market research provider scores itself high for several reasons. It has generated a 36.5% net margin over the last four quarters on revenue of $8.3 billion. S&P’s products are well regarded in the industry and are about to expand with the pending acquisition of capital markets data provider IHS Markit.
S&P Global is fresh from a multiyear restructuring that has prioritized higher growth businesses like bond ratings where it faces little competition. This should continue to drive strong performances and a high ROE. A current ratio of 2.3 and capital structure comprising 45% debt also point to a clean bill of financial health. Last year’s operating profits covered the company’s interest expense by a 35:1 ratio.
The stock pays a small dividend (0.8%) yield and is part of a share buyback program that is expected to be reinstated following the completion of the IHS Markit merger. S&P Global shares are starting to recover from the $100 dip from their December 2021 peak. After falling to the back of the pack, this company has the stamina to run to new record highs.