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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 champions,” companies that have consistently increased their dividend over the last 25 years.

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.

[Click to enlarge]

Do you think these companies have strong profitability? Use this list as a starting-off point for your own analysis. List sorted by dividend yield.

1. HCP, Inc. (HCP): HCP, Inc. is an independent hybrid real estate investment trust. Dividend yield at 5.29%. MRQ net profit margin at 46.81% vs. 27.57% y/y. MRQ sales/assets at 0.028 vs. 0.025 y/y. MRQ assets/equity at 1.935 vs. 2.003 y/y. The stock is currently in an uptrend, trading above short-term and long-term moving averages.

2. MGE Energy Inc. (MGEE): Operates as a public utility holding company. Dividend yield at 3.68%. MRQ net profit margin at 10.85% vs. 10.59% y/y. MRQ sales/assets at 0.088 vs. 0.085 y/y. MRQ assets/equity at 2.471 vs. 2.501 y/y. The stock is currently in an uptrend, trading above short-term and long-term moving averages.

3. Connecticut Water Service Inc. (CTWS): Operates as a regulated water company in Connecticut. Dividend yield at 3.65%. MRQ net profit margin at 19.99% vs. 14.53% y/y. MRQ sales/assets at 0.04 vs. 0.038 y/y. MRQ assets/equity at 3.695 vs. 3.833 y/y.

4. Genuine Parts Company (GPC): Distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials in the United States, Puerto Rico, Canada, and Mexico. Dividend yield at 3.25%. MRQ net profit margin at 4.77% vs. 4.37% y/y. MRQ sales/assets at 0.557 vs. 0.546 y/y. MRQ assets/equity at 1.957 vs. 1.959 y/y. The stock is in rally mode, trading above its 20-day, 50-day and 200-day moving averages.

5. American States Water Company (AWR): Provides water, electric, and contracted services in the United States. Dividend yield at 3.2%. MRQ net profit margin at 14.53% vs. 9.39% y/y. MRQ sales/assets at 0.092 vs. 0.082 y/y. MRQ assets/equity at 3.05 vs. 3.138 y/y. The stock is currently in an uptrend, trading above short-term and long-term moving averages.

6. PPG Industries Inc. (PPG): PPG Industries, Inc. manufactures and supplies protective and decorative coatings. Dividend yield at 3.04%. MRQ net profit margin at 8.53% vs. 7.87% y/y. MRQ sales/assets at 0.261 vs. 0.259 y/y. MRQ assets/equity at 3.766 vs. 3.874 y/y.

7. Emerson Electric Co. (EMR): Operates as a diversified manufacturing and technology company. Dividend yield at 3.03%. MRQ net profit margin at 10.86% vs. 10.8% y/y. MRQ sales/assets at 0.261 vs. 0.236 y/y. MRQ assets/equity at 2.223 vs. 2.572 y/y. There's no profit to be made by betting against the company, at least according to short sellers. The stock's short float, for example, is at 1.01%, much lower than market averages.

8. Air Products & Chemicals Inc. (APD): Provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. Dividend yield at 2.85%. MRQ net profit margin at 12.67% vs. 11.24% y/y. MRQ sales/assets at 0.178 vs. 0.173 y/y. MRQ assets/equity at 2.319 vs. 2.485 y/y. There's no profit to be made by betting against the company, at least according to short sellers. The stock's short float, for example, is at 1.16%, much lower than market averages.

9. National Fuel Gas Co. (NFG): Operates as a diversified energy company primarily in the United States. Dividend yield at 2.29%. MRQ net profit margin at 12.31% vs. 12.1% y/y. MRQ sales/assets at 0.074 vs. 0.071 y/y. MRQ assets/equity at 2.774 vs. 2.842 y/y. It's worth pointing out that the stock has a low short float (currently at 1.03%), which may suggest that sophisticated investors, like short sellers, think the stock's upside potential outweighs the downside.

10. Dover Corp. (DOV): Dover Corporation manufactures and sells industrial products and components, and consumables. Dividend yield at 2.23%. MRQ net profit margin at 11.58% vs. 9.51% y/y. MRQ sales/assets at 0.227 vs. 0.221 y/y. MRQ assets/equity at 1.93 vs. 1.979 y/y. Short sellers have been avoiding the stock, with only 1.35% of the company's shares being shorted. It's also worth pointing out that the company's PEG ratio seems to be signaling undervalued conditions (PEG ratio at 1).

11. V.F. Corporation (VFC): Designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. Dividend yield at 2.18%. MRQ net profit margin at 7.03% vs. 6.95% y/y. MRQ sales/assets at 0.271 vs. 0.252 y/y. MRQ assets/equity at 1.593 vs. 1.733 y/y. The stock is in rally mode, trading above its 20-day, 50-day and 200-day moving averages.

12. Parker Hannifin Corporation (PH): Parker Hannifin Corporation manufactures fluid power systems, electromechanical controls, and related components. Dividend yield at 2.05%. MRQ net profit margin at 8.57% vs. 7.97% y/y. MRQ sales/assets at 0.313 vs. 0.281 y/y. MRQ assets/equity at 2.022 vs. 2.269 y/y. There's no profit to be made by betting against the company, at least according to short sellers. The stock's short float, for example, is at 1.16%, much lower than market averages.

13. Hormel Foods Corp. (HRL): Produces and markets various meat and food products in the United States and Internationally. Dividend yield at 1.86%. MRQ net profit margin at 5.15% vs. 4.93% y/y. MRQ sales/assets at 0.46 vs. 0.45 y/y. MRQ assets/equity at 1.556 vs. 1.669 y/y.

14. Raven Industries Inc. (RAVN): Raven Industries Inc. manufactures products for industrial, agricultural, construction, and military/aerospace markets in North America. Dividend yield at 1.36%. MRQ net profit margin at 13.79% vs. 11.41% y/y. MRQ sales/assets at 0.427 vs. 0.379 y/y. MRQ assets/equity at 1.288 vs. 1.292 y/y.

15. Donaldson Company, Inc. (DCI): Engages in the manufacture and sale of filtration systems and replacement parts worldwide. Dividend yield at 1.05%. MRQ net profit margin at 10.52% vs. 9.93% y/y. MRQ sales/assets at 0.362 vs. 0.344 y/y. MRQ assets/equity at 1.847 vs. 2.008 y/y. The stock's short float is at 1.72%, which is much lower than market averages.

*Dividend champions sourced from DRiP Investing, Accounting data sourced from Google Finance, all other data sourced from Finviz. Data sourced Friday Sep 2nd.

Source: 15 Dividend Champions With Strong Sources Of Profitability