There is always more to a company’s story than the bottom line. Although the bottom line, or net income, is the headline number that analysts watch and journalists report, companies can earn these profits in different ways – some more preferred than others. This is why it is always a good idea to study the source of profits for a company.
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 due to increased use of leverage.
To illustrate this analysis, we ran DuPont on dividend stocks that appear highly undervalued, with PEG below 1 and P/FCF below 15.
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 impressive profitability? Use this list as a starting point for your own analysis.
List sorted by change in ROE.
1. Protective Life Corp. (PL): Engages in the production, distribution and administration of insurance and investment products in the United States. Market cap of $1.65B. PEG at 0.63. P/FCF at 2.94. Dividend yield at 3.60%, payout ratio at 16.05%. MRQ Net Profit Margin increased to 10.31% from 5.81% year-over-year, Sales/Assets increased to 0.0177 from 0.0160, while Assets/Equity decreased to 14.14 from 14.45. This is a risky stock that is significantly more volatile than the overall market (beta = 2.99). It has been a rough couple of days for the stock, losing 6.86% over the last week. The stock has had a good month, gaining 10.92%.
2. 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 $5.98B. PEG at 0.81. P/FCF at 9.88. Dividend yield at 3.91%, payout ratio at 21.07%. 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. The stock has gained 27.88% over the last year.
3. Jabil Circuit Inc. (JBL): Provides electronic manufacturing services and solutions in the Americas, Europe and Asia. Market cap of $3.68B. PEG at 0.64. P/FCF at 13.38. Dividend yield at 1.66%, payout ratio at 19.14%. MRQ Net Profit Margin increased to 2.48% from 1.51% year-over-year, Sales/Assets increased to 0.6078 from 0.6070, while Assets/Equity decreased to 3.60 from 3.80. This is a risky stock that is significantly more volatile than the overall market (beta = 2.1). The stock has had a good month, gaining 20.2%.
4. Standard Motor Products Inc. (SMP): Distributes replacement parts for motor vehicles in the automotive aftermarket industry primarily in the United States, Canada and Latin America. Market cap of $298.26M. PEG at 0.41. P/FCF at 8.03. Dividend yield at 2.15%, payout ratio at 15.80%. MRQ Net Profit Margin increased to 5.47% from 3.33% year-over-year, Sales/Assets increased to 0.45 from 0.42, while Assets/Equity decreased to 2.30 from 2.73. This is a risky stock that is significantly more volatile than the overall market (beta = 2.33). The stock has had a good month, gaining 24.1%.
5. Torchmark Corp. (TMK): Provides individual life and supplemental health insurance products and annuities to middle income households. Market cap of $3.91B. PEG at 0.91. P/FCF at 4.13. Dividend yield at 1.29%, payout ratio at 9.17%. MRQ Net Profit Margin increased to 16.98% from 15.08% year-over-year, Sales/Assets increased to 0.0541 from 0.0493, while Assets/Equity decreased to 4.29 from 4.30. The stock has had a good month, gaining 12.27%.
6. Staples, Inc. (SPLS): Operates as an office products company. Market cap of $10.15B. PEG at 0.77. P/FCF at 12.5. Dividend yield at 2.80%, payout ratio at 36.27%. MRQ Net Profit Margin increased to 3.03% from 2.34% year-over-year, Sales/Assets increased to 0.43 from 0.42, while Assets/Equity decreased to 1.92 from 2.05. The stock has lost 23.31% over the last year.
7. Janus Capital Group, Inc. (JNS): A publicly owned asset management holding company. Market cap of $1.28B. PEG at 0.91. P/FCF at 4.95. Dividend yield at 2.91%, payout ratio at 5.22%. MRQ Net Profit Margin increased to 15.87% from 12.11% year-over-year, Sales/Assets increased to 0.0990 from 0.0980, while Assets/Equity decreased to 2.15 from 2.42. This is a risky stock that is significantly more volatile than the overall market (beta = 2.67). It has been a rough couple of days for the stock, losing 7.04% over the last week.
8. Computer Sciences Corporation (CSC): Provides information technology (IT) and professional services to governments and commercial enterprises. Market cap of $4.53B. PEG at 0.67. P/FCF at 9.95. Dividend yield at 2.74%, payout ratio at 15.47%. MRQ Net Profit Margin increased to 4.54% from 3.66% year-over-year, Sales/Assets increased to 0.25 from 0.24, while Assets/Equity decreased to 2.13 from 2.47. The stock has lost 28.81% 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.
