There is always more to a company’s story than its 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.
= (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 a screen on stocks paying dividend yields above 4%.
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 (SPY) index over the last month.
(Click chart for more detail)
Do you think these companies have impressive profitability? Use this list as a starting-off point for your own analysis.
List sorted by dividend yield.
1. Destination Maternity Corporation (DEST): Engages in the design and retail of maternity apparel. Market cap of $175.96M. Dividend yield at 5.26%, payout ratio at 28.01%. MRQ Net Profit Margin increased to 6.45% from 6.09% year-over-year, Sales/Assets increased to 0.73 from 0.71, while Assets/Equity decreased to 2.19 from 3.01. The stock is currently stuck in a downtrend, trading 5.8% below its SMA20, 19.19% below its SMA50, and 32.08% below its SMA200. It's been a rough couple of days for the stock, losing 5.07% over the last week.
2. TESSCO Technologies Inc. (TESS): Provides integrated product and supply chain solutions to support the construction, operation, and use of mobility and data wireless systems. Market cap of $107.72M. Dividend yield at 4.32%, payout ratio at 27.62%. MRQ Net Profit Margin increased to 2.79% from 1.46% year-over-year, Sales/Assets increased to 0.91 from 0.85, while Assets/Equity decreased to 2.16 from 2.34. The stock has gained 37.9% over the last year.
3. Public Service Enterprise Group Inc. (PEG): Operates in the energy industry primarily in the northeastern and mid Atlantic United States. Market cap of $16.33B. Dividend yield at 4.24%, payout ratio at 42.80%. MRQ Net Profit Margin increased to 13.08% from 9.49% year-over-year, Sales/Assets increased to 0.09 from 0.08, while Assets/Equity decreased to 2.85 from 3.15. The stock has had a good month, gaining 12.59%.
4. NextEra Energy, Inc. (NEE): Engages in the generation, transmission, distribution, and sale of electric energy in the United States, and Canada. Market cap of $22.62B. Dividend yield at 4.10%, payout ratio at 48.28%. MRQ Net Profit Margin increased to 14.64% from 11.61% year-over-year, Sales/Assets increased to 0.0726 from 0.0701, while Assets/Equity decreased to 3.66 from 3.79. It's been a rough couple of days for the stock, losing 5.5% over the last week.
5. Hillenbrand, Inc. (HI): Manufactures, distributes, and sells funeral service products to licensed funeral directors operating licensed funeral homes. Market cap of $1.17B. Dividend yield at 4.08%, payout ratio at 45.47%. 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 7.92 days of average volume). It's been a rough couple of days for the stock, losing 6.44% over the last week.
6. 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 $429.40M. Dividend yield at 4.05%, payout ratio at 31.11%. 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 5.5% 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.