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.
= (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 strong liquidity positions, with current ratios and quick ratios above 3.
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.
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 stocks pay reliable dividends? Use this list as a starting-off point for your own analysis.
List sorted by dividend yield.
1. KLA-Tencor Corporation (KLAC): Engages in the design, manufacture, and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Market cap of $5.72B. Dividend yield at 4.09%, payout ratio at 21.07%. Current ratio at 4.17, quick ratio at 3.51. MRQ Net Profit Margin increased to 27.46% from 20.21% year-over-year, Sales/Assets increased to 0.19 from 0.14, while Assets/Equity decreased to 1.63 from 1.74. Might be undervalued at current levels, with a PEG ratio at 0.77, and P/FCF ratio at 9.46. It's been a rough couple of days for the stock, losing 7.13% over the last week.
2. Superior Industries International, Inc. (SUP): Designs, develops, manufactures, sells, and supplies cast aluminum road wheels to automobile and light truck manufacturers primarily in North America. Market cap of $429.94M. Dividend yield at 4.04%, payout ratio at 31.11%. Current ratio at 6.07, quick ratio at 4.85. MRQ Net Profit Margin increased to 7.04% from 5.19% year-over-year, Sales/Assets increased to 0.3545 from 0.3468, while Assets/Equity decreased to 1.35 from 1.48. It's been a rough couple of days for the stock, losing 7.1% over the last week.
3. Hillenbrand, Inc. (HI): Hillenbrand, Inc., through its subsidiary, Batesville Services, Inc., manufactures, distributes, and sells funeral service products to licensed funeral directors operating licensed funeral homes. Market cap of $1.20B. Dividend yield at 3.98%, payout ratio at 45.47%. Current ratio at 3.71, quick ratio at 3.05. MRQ Net Profit Margin increased to 10.65% from 6.46% year-over-year, Sales/Assets increased to 0.21 from 0.20, while Assets/Equity decreased to 2.18 from 2.96. The stock is a short squeeze candidate, with a short float at 5.41% (equivalent to 7.79 days of average volume). It's been a rough couple of days for the stock, losing 6.92% over the last week.
*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.