Seeking Alpha
Recommended for you:
Value, growth, long-term horizon, medium-term horizon
Profile| Send Message|
( followers)  

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 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.

ROE
= (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.

To illustrate this analysis, we ran DuPont on dividend stocks with attractive dividend trends: rising dividends (comparing the current year dividend per share to last year’s dividend per share) and falling payout ratio (comparing the trailing-twelve-month ratio to the company’s three-year average).

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

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.

Do you think these companies pay reliable dividend yields? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. American Express Company (NYSE:AXP): Mortgage Investment Industry. Market cap of $54.75B. Dividend yield at 1.57%, payout ratio at 18.88%. Current year dividend per share estimate at $0.73 vs. last year dividend per share at $0.72. TTM payout ratio at 18.88% vs. 3-year average at 28.90%. Net profit margin has increased to 16.24% from 13.72% one year ago. Sales/Assets has increased to 0.06 from 0.05, while Assets/Equity has decreased to 8.12 from 9.91. The stock is currently stuck in a downtrend, trading 8.71% below its SMA20, 11.31% below its SMA50, and 5.41% below its SMA200. The stock has had a couple of great days, gaining 7.15% over the last week. The stock has performed poorly over the last month, losing 11.48%.

2. Prudential plc (NYSE:PUK): Life Insurance Industry. Market cap of $26.03B. Dividend yield at 4.03%, payout ratio at 34.70%. Current year dividend per share estimate at $0.81 vs. last year dividend per share at $0.78. TTM payout ratio at 34.70% vs. 3-year average at 71.88%. Net profit margin has increased to 3.99% from -1.85% one year ago. Sales/Assets has increased to 0.08 from 0.07, while Assets/Equity has decreased to 31.7 from 42.24. The stock is currently stuck in a downtrend, trading 7.53% below its SMA20, 11.76% below its SMA50, and 11.52% below its SMA200. The stock has had a couple of great days, gaining 14.01% over the last week.

3. Harley-Davidson, Inc. (NYSE:HOG): Recreational Vehicles Industry. Market cap of $8.76B. Dividend yield at 1.35%, payout ratio at 27.74%. Current year dividend per share estimate at $0.46 vs. last year dividend per share at $0.40. TTM payout ratio at 27.74% vs. 3-year average at 45.32%. Net profit margin has increased to 12.66% from 5.44% one year ago. Sales/Assets has increased to 0.16 from 0.13, while Assets/Equity has decreased to 3.7 from 4.78. This is a risky stock that is significantly more volatile than the overall market (beta = 2.22). The stock is currently stuck in a downtrend, trading 15.94% below its SMA20, 14.57% below its SMA50, and 9.66% below its SMA200. The stock has performed poorly over the last month, losing 17.85%.

4. KLA-Tencor Corporation (NASDAQ:KLAC): Semiconductor Equipment & Materials Industry. Market cap of $6.04B. Dividend yield at 3.87%, payout ratio at 21.07%. Current year dividend per share estimate at $1.21 vs. last year dividend per share at $1.00. TTM payout ratio at 21.07% vs. 3-year average at 123.74%. Net profit margin has increased to 27.46% from 20.21% one year ago. Sales/Assets has increased to 0.19 from 0.14, while Assets/Equity has decreased to 1.63 from 1.74. The stock is currently stuck in a downtrend, trading 10.56% below its SMA20, 12.58% below its SMA50, and 16.58% below its SMA200. The stock has performed poorly over the last month, losing 13.87%.

5. HB Fuller Co. (NYSE:FUL): Specialty Chemicals Industry. Market cap of $1.04B. Dividend yield at 1.42%, payout ratio at 17.46%. Current year dividend per share estimate at $0.28 vs. last year dividend per share at $0.28. TTM payout ratio at 17.46% vs. 3-year average at 22.91%. Net profit margin has increased to 6.38% from 3.16% one year ago. Sales/Assets has increased to 0.32 from 0.31, while Assets/Equity has decreased to 1.73 from 2. The stock is currently stuck in a downtrend, trading 9.14% below its SMA20, 11.72% below its SMA50, and 7.24% below its SMA200. The stock has had a couple of great days, gaining 5.14% over the last week. The stock has performed poorly over the last month, losing 12.03%.

6. Keynote Systems Inc. (NASDAQ:KEYN): Internet Software & Services Industry. Market cap of $365.93M. Dividend yield at 1.13%, payout ratio at 29.55%. Current year dividend per share estimate at $0.24 vs. last year dividend per share at $0.20. TTM payout ratio at 29.55% vs. 3-year average at 48.43%. Net profit margin has increased to 15.61% from -1.66% one year ago. Sales/Assets has increased to 0.12 from 0.11, while Assets/Equity has decreased to 1.2 from 1.22. After a solid performance over the last year, KEYN has pulled back during recent sessions. The stock is 8.6% below its SMA20 and 4.37% below its SMA50, but remains 11.77% above its SMA200. The stock has gained 131.77% over the last year.

*Dividend per share and payout ratio data sourced from Screener.co, accounting ratio data sourced from Google Finance, all other data sourced from Finviz.

Source: 6 Stocks With Rising Dividends, Falling Payout Ratios, And Strong Sources of Profitability