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It is important to remember that dividends are not a guarantee of future payments; therefore, dividend sustainability should be a part of any analysis into potential income investments.

One consideration is the strength of the company’s profitability, which directly funds the dividend. With this in mind, we ran a DuPont analysis of high dividend yield stocks.

We last wrote about this screen on April 12, 2011. On that day, the screen produced 9 companies. Since then, 8 out of 9 companies mentioned in that article have outperformed the S&P 500 index (a success rate of 89%). The screen averaged a return of 5.5% vs. an index return of 2.1% (both of which calculated as price-weighted returns). Click here to access a full breakdown of the screen's past performance.

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With past performance in mind, we decided to run the same screen today, and see which companies show up in the update.

From this DuPont analysis, we found 9 companies that passed all requirements for positive results. 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 profits due to operations and not to increased use of leverage.

Do you think these stocks’ dividends are sustainable? Use this list as a starting-off point for your own analysis.

List sorted by increase in quarterly ROE year-over-year.

1. Reynolds American Inc. (RAI):
Cigarettes Industry. Market cap of $22.07B. Dividend yield at 5.60%. Return on Equity increased from 1.29% to 5.36%. When analyzing the sources of return, Net Profit Margin increased from 4.13% to 17.73%. Sales/Assets increased from 0.1079 to 0.1123, while Assets/Equity decreased from 2.8929 to 2.6897 (comparing 3 months ending 3/31/10 vs. 3 months ending 3/31/11). The stock has gained 49.21% over the last year.

2. Telecom Italia SpA (TI):
Diversified Communication Services Industry. Market cap of $27.46B. Dividend yield at 5.91%. Return on Equity increased from 1.63% to 4.52%. When analyzing the sources of return, Net Profit Margin increased from 6.06% to 16.76%. Sales/Assets increased from 0.0811 to 0.0871, while Assets/Equity decreased from 3.3241 to 3.0928 (comparing 3 months ending 12/31/09 vs. 3 months ending 12/31/10).

3. Garmin Ltd. (GRMN): Scientific & Technical Instruments Industry. Market cap of $6.80B. Dividend yield at 4.28%. Return on Equity increased from 1.46% to 2.99%. When analyzing the sources of return, Net Profit Margin increased from 8.66% to 18.80%. Sales/Assets increased from 0.1214 to 0.1290, while Assets/Equity decreased from 1.3901 to 1.2331 (comparing 13 weeks ending 3/27/10 vs. 13 weeks ending 3/26/11). The stock is a short squeeze candidate, with a short float at 16.58% (equivalent to 12.17 days of average volume).

4. Bristol-Myers Squibb Company (BMY): Drug Manufacturers Industry. Market cap of $49.06B. Dividend yield at 4.59%. Return on Equity increased from 4.87% to 6.16%. When analyzing the sources of return, Net Profit Margin increased from 15.46% to 19.68%. Sales/Assets increased from 0.1563 to 0.1624, while Assets/Equity decreased from 2.0167 to 1.9284 (comparing 3 months ending 3/31/10 vs. 3 months ending 3/31/11). The stock has gained 23.59% over the last year.

5. Alliant Energy Corporation (LNT): Diversified Utilities Industry. Market cap of $4.52B. Dividend yield at 4.17%. Return on Equity increased from 1.59% to 2.52%. When analyzing the sources of return, Net Profit Margin increased from 5.40% to 8.43%. Sales/Assets increased from 0.0981 to 0.1005, while Assets/Equity decreased from 3.0071 to 2.9696 (comparing 3 months ending 3/31/10 vs. 3 months ending 3/31/11). The stock has gained 24.79% over the last year.

6. Magellan Midstream Partners LP (MMP):
Oil & Gas Pipelines Industry. Market cap of $6.56B. Dividend yield at 5.29%. Return on Equity increased from 5.43% to 6.29%. When analyzing the sources of return, Net Profit Margin increased from 19.57% to 20.35%. Sales/Assets increased from 0.1023 to 0.1166, while Assets/Equity decreased from 2.7109 to 2.6491 (comparing 3 months ending 3/31/10 vs. 3 months ending 3/31/11). The stock has gained 33.34% over the last year.

7. Nationwide Health Properties Inc. (NHP): REIT Industry. Market cap of $5.44B. Dividend yield at 4.47%. Return on Equity increased from 1.53% to 2.22%. When analyzing the sources of return, Net Profit Margin increased from 31.17% to 41.31%. Sales/Assets increased from 0.0264 to 0.0295, while Assets/Equity decreased from 1.8533 to 1.8222 (comparing 3 months ending 3/31/10 vs. 3 months ending 3/31/11). The stock has gained 24.38% over the last year.

8. AT&T, Inc. (T): Telecom Services Industry. Market cap of $185.50B. Dividend yield at 5.48%. Return on Equity increased from 2.40% to 3.03%. When analyzing the sources of return, Net Profit Margin increased from 8.03% to 10.91%. Sales/Assets increased from 0.1149 to 0.1166, while Assets/Equity decreased from 2.6043 to 2.3820 (comparing 3 months ending 3/31/10 vs. 3 months ending 3/31/11). The stock has gained 29.08% over the last year.

9. TransCanada Corp. (TRP): Gas Utilities Industry. Market cap of $30.14B. Dividend yield at 4.10%. Return on Equity increased from 1.98% to 2.51%. When analyzing the sources of return, Net Profit Margin increased from 16.27% to 18.95%. Sales/Assets increased from 0.0440 to 0.0488, while Assets/Equity decreased from 2.7684 to 2.7209 (comparing 3 months ending 3/31/10 vs. 3 months ending 3/31/11). The stock has gained 26.04% over the last year.

*Accounting 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: 9 High-Yield Stocks With Strong Sources of Profitability