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How do you know when a company’s dividend is sustainable? You can always look at historical dividend trends for the company, but another way to is to study the health of the company’s profitability – through DuPont analysis of the company’s return on equity.

With that in mind, we ran a DuPont analysis of the return on equity (ROE) of all U.S. companies with dividend yields between 4-7%. From this analysis, we found 9 companies that passed all requirements for positive results. Click to expand image:



We broke the ROE equation into three parts:




ROE

  • = (Net Profit/Equity)
  • = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
  • = (Net Profit margin)*(Asset turnover)*(Leverage ratio)




All of the stocks mentioned below have seen rising ROE values for the recent quarter, year-over-year. Then we wanted to analyze the sources of these returns, so we narrowed down the original universe to only focus on companies with the following characteristics:

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio
  • Improving asset use efficiency (i.e. declining Sales/Assets ratio) and improving net profit margin (i.e. declining Net Income/Sales ratio)


Companies passing all requirements are thus experiencing increasing return on equity due to operations and not to increased use of leverage.

Do you think these companies’ dividends are reliable? Use this list as a starting-off point for you own analysis into company dividends.

List sorted by increase in ROE. Note: All ratios compare the most recent quarter's values against last year's corresponding quarter.

1. R.R. Donnelley & Sons Company (RRD): Business Services Industry. Market cap of $4.02B. Dividend yield at 5.34%. Return on Equity increased from -3.73% to 1.21%. When analyzing the sources of return, Net Profit Margin increased from -3.08% to 1.00%. Sales/Assets increased from 0.2953 to 0.2980, while Assets/Equity decreased from 4.0992 to 4.0836. This is a risky stock that is significantly more volatile than the overall market (beta = 2.01).

2. Dominion Resources, Inc. (D): Electric Utilities Industry. Market cap of $25.49B. Dividend yield at 4.48%. Return on Equity increased from -0.08% to 2.43%. When analyzing the sources of return, Net Profit Margin increased from -0.28% to 7.96%. Sales/Assets increased from 0.0746 to 0.0875, while Assets/Equity decreased from 3.7191 to 3.4941. The stock has gained 9% over the last year.

3. Reynolds American Inc. (RAI): Cigarette Industry. Market cap of $21.02B. Dividend yield at 5.88%. Return on Equity increased from 3.31% to 4.75%. When analyzing the sources of return, Net Profit Margin increased from 10.26% to 14.85%. Sales/Assets increased from 0.1164 to 0.1219, while Assets/Equity decreased from 2.7715 to 2.6233. The stock has gained 41.4% over the last year.

4. DPL Inc. (DPL): Diversified Utilities Industry. Market cap of $3.21B. Dividend yield at 4.85%. Return on Equity increased from 4.44% to 5.76%. When analyzing the sources of return, Net Profit Margin increased from 12.31% to 15.23%. Sales/Assets increased from 0.1113 to 0.1231, while Assets/Equity decreased from 3.2434 to 3.0718. The stock is a short squeeze candidate, with a short float at 5.18% (equivalent to 8.33 days of average volume). The stock has gained 5.3% over the last year. 



5. Pinnacle West Capital Corporation (PNW): Electric Utilities Industry. Market cap of $4.62B. Dividend yield at 4.95%. Return on Equity increased from -0.91% to 0.20%. When analyzing the sources of return, Net Profit Margin increased from -4.56% to 1.08%. Sales/Assets increased from 0.0551 to 0.0553, while Assets/Equity decreased from 3.6146 to 3.3564. The stock has gained 17.88% over the last year. 



6. ONEOK Partners, L.P. (OKS): Oil & Gas Pipelines Industry. Market cap of $8.44B. Dividend yield at 5.50%. Return on Equity increased from 3.85% to 4.35%. When analyzing the sources of return, Net Profit Margin increased from 5.11% to 6.06%. Sales/Assets increased from 0.2850 to 0.2963, while Assets/Equity decreased from 2.6472 to 2.4207. OKS has a relatively low correlation to the market (beta = 0.48), which may be appealing to risk-averse investors. The stock has gained 38.57% over the last year.



7. Mack-Cali Realty Corp. (CLI): REIT Industry. Market cap of $2.82B. Dividend yield at 5.54%. Return on Equity increased from 0.08% to 0.41%. When analyzing the sources of return, Net Profit Margin increased from 0.78% to 3.71%. Sales/Assets increased from 0.0410 to 0.0440, while Assets/Equity decreased from 2.5781 to 2.4811. The stock has lost 10% over the last year. 



8. Piedmont Office Realty Trust Inc. (PDM): REIT Industry. Market cap of $3.28B. Dividend yield at 6.64%. Return on Equity increased from 0.97% to 1.04%. When analyzing the sources of return, Net Profit Margin increased from 17.37% to 18.97%. Sales/Assets increased from 0.0340 to 0.0346, while Assets/Equity decreased from 1.6423 to 1.5805. The stock has gained 1.23% over the last year.



9. TECO Energy, Inc. (TE): Electric Utilities Industry. Market cap of $4.02B. Dividend yield at 4.39%. Return on Equity increased from 2.57% to 2.61%. When analyzing the sources of return, Net Profit Margin increased from 6.99% to 7.32%. Sales/Assets increased from 0.1060 to 0.1077, while Assets/Equity decreased from 3.4619 to 3.3159. The stock has gained 19.58% over the last year.

* ROE data sourced from Google Finance, all other data sourced from Finviz.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Value Ideas: 9 High Dividend Yield Stocks With Encouraging ROE Trends