A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks.
One way to analyze sources of profitability is with the DuPont analysis of return on equity (ROE) profitability.
ROE can be broken up into three components such that increases in ROE can be attributed to those components.
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with ...
- Decreasing leverage, i.e. decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
To illustrate this analysis, we ran DuPont on companies seeing rapid dividend growth, comparing the current year dividend per share estimate to the trailing-twelve-month dividend per share.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
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Do you think these stocks will continue to raise their dividends? Use this list as a starting point for your own analysis.
List sorted by dividend yield.
1. International Paper Co. (NYSE:IP): Paper and Paper Products Industry. Market cap of $12.99B. Dividend yield at 3.55%, payout ratio at 24.96%. Current year dividend per share estimate at $0.97 vs. TTM dividend per share at $0.70. MRQ net profit margin has increased to 5.35% from -2.79% one year ago, MRQ Sales/Assets has improved to 0.25 from 0.23, and MRQ Assets/Equity has decreased to 3.50 from 4.32. This is a risky stock that is significantly more volatile than the overall market (beta = 2.2). The stock has gained 25.85% over the last year.
2. The Dow Chemical Company (NYSE:DOW): Chemicals Industry. Market cap of $40.99B. Dividend yield at 2.88%, payout ratio at 32.20%. Current year dividend per share estimate at $0.86 vs. TTM dividend per share at $0.70. MRQ net profit margin has increased to 6.65% from 4.78% one year ago, MRQ Sales/Assets has improved to 0.23 from 0.21, and MRQ Assets/Equity has decreased to 2.83 from 3.15. This is a risky stock that is significantly more volatile than the overall market (beta = 2.27). The stock has gained 30.31% over the last year.
3. Innophos Holdings Inc (NASDAQ:IPHS): Specialty Chemicals Industry. Market cap of $1.05B. Dividend yield at 2.08%, payout ratio at 27.53%. Current year dividend per share estimate at $1.00 vs. TTM dividend per share at $0.76. MRQ net profit margin has increased to 13.14% from 6.12% one year ago, MRQ Sales/Assets has improved to 0.31 from 0.26, and MRQ Assets/Equity has decreased to 1.81 from 2.15. The stock has gained 67.89% over the last year.
*Dividend data sourced from Screener.co, 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.