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Bottom-line earnings should always be taken with a grain of salt. 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 sources 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 to increased use of leverage.

To illustrate this analysis, we ran DuPont on dividend stocks in the S&P 500 (NYSEARCA:SPY) that are rallying above their 20-day, 50-day, and 200-day moving averages.

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.

(Click chart for more detail)

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. NextEra Energy, Inc. (NYSE:NEE): Engages in the generation, transmission, distribution, and sale of electric energy in the United States and Canada. Market cap of $22.87B. Dividend yield at 4.06%, payout ratio at 48.28%. The stock is currently trading at 1.06% above its 20-Day SMA, 1.10% above its 50-Day SMA, and 0.59% above its 200-Day SMA. 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. The stock has gained 2.65% over the last year.

2. KLA-Tencor Corporation (NASDAQ: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 $6.92B. Dividend yield at 3.37%, payout ratio at 21.07%. The stock is currently trading at 11.12% above its 20-Day SMA, 16.15% above its 50-Day SMA, and 4.38% above its 200-Day SMA. 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 0.94, and P/FCF ratio at 11.44. The stock has had a couple of great days, gaining 8.52% over the last week.

3. Wisconsin Energy Corp. (NYSE:WEC): Engages in the generation, distribution, and sale of electric energy and steam. Market cap of $7.36B. Dividend yield at 3.30%, payout ratio at 42.43%. The stock is currently trading at 2.38% above its 20-Day SMA, 4.06% above its 50-Day SMA, and 6.09% above its 200-Day SMA. MRQ Net Profit Margin increased to 11.04% from 9.96% year-over-year, Sales/Assets increased to 0.08 from 0.07, while Assets/Equity decreased to 3.29 from 3.42. The stock has gained 11.79% over the last year.

4. Baxter International Inc. (NYSE:BAX): Develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. Market cap of $31.62B. Dividend yield at 2.23%, payout ratio at 32.89%. The stock is currently trading at 3.38% above its 20-Day SMA, 4.87% above its 50-Day SMA, and 4.51% above its 200-Day SMA. MRQ Net Profit Margin increased to 17.39% from 16.75% year-over-year, Sales/Assets increased to 0.20 from 0.19, while Assets/Equity decreased to 2.54 from 2.80. The stock has gained 15.87% over the last year.

5. V.F. Corporation (NYSE:VFC): Designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. Market cap of $14.21B. Dividend yield at 1.95%, payout ratio at 43.15%. The stock is currently trading at 7.51% above its 20-Day SMA, 14.53% above its 50-Day SMA, and 31.87% above its 200-Day SMA. MRQ Net Profit Margin increased to 7.03% from 6.95% year-over-year, Sales/Assets increased to 0.27 from 0.25, while Assets/Equity decreased to 1.59 from 1.73. The stock has had a couple of great days, gaining 6.55% over the last week.

6. Nordstrom Inc. (NYSE:JWN): A fashion specialty retailer, offers apparel, shoes, cosmetics, and accessories for women, men, and children in the United States. Market cap of $10.35B. Dividend yield at 1.89%, payout ratio at 29.66%. The stock is currently trading at 7.71% above its 20-Day SMA, 13.14% above its 50-Day SMA, and 12.85% above its 200-Day SMA. MRQ Net Profit Margin increased to 6.23% from 5.81% year-over-year, Sales/Assets increased to 0.36 from 0.34, while Assets/Equity decreased to 3.86 from 4.03. The stock has had a couple of great days, gaining 6.59% over the last week.

7. Hormel Foods Corp. (NYSE:HRL): Produces and markets various meat and food products in the United States and Internationally. Market cap of $7.47B. Dividend yield at 1.81%, payout ratio at 27.20%. The stock is currently trading at 3.77% above its 20-Day SMA, 3.09% above its 50-Day SMA, and 2.79% above its 200-Day SMA. MRQ Net Profit Margin increased to 5.15% from 4.93% year-over-year, Sales/Assets increased to 0.46 from 0.45, while Assets/Equity decreased to 1.56 from 1.67. The stock is a short squeeze candidate, with a short float at 6.83% (equivalent to 6.96 days of average volume). The stock has gained 26.66% over the last year.

8. Tiffany & Co. (NYSE:TIF): Engages in the design, manufacture, and retail of fine jewelry worldwide. Market cap of $8.45B. Dividend yield at 1.75%, payout ratio at 32.49%. The stock is currently trading at 1.65% above its 20-Day SMA, 2.79% above its 50-Day SMA, and 4.49% above its 200-Day SMA. MRQ Net Profit Margin increased to 10.32% from 10.12% year-over-year, Sales/Assets increased to 0.22 from 0.19, while Assets/Equity decreased to 1.67 from 1.75. The stock has had a couple of great days, gaining 9.13% over the last week.

9. Total System Services, Inc. (NYSE:TSS): Provides electronic payment processing and other services to card-issuing and merchant acquiring institutions. Market cap of $3.46B. Dividend yield at 1.56%, payout ratio at 27.56%. The stock is currently trading at 3.42% above its 20-Day SMA, 4.24% above its 50-Day SMA, and 2.92% above its 200-Day SMA. MRQ Net Profit Margin increased to 12.01% from 11.53% year-over-year, Sales/Assets increased to 0.24 from 0.23, while Assets/Equity decreased to 1.40 from 1.53. The stock has had a couple of great days, gaining 6.08% over the last week.

10. Macy's, Inc. (NYSE:M): Operates department stores and Internet Web sites in the United States. Market cap of $11.51B. Dividend yield at 1.48%, payout ratio at 12.16%. The stock is currently trading at 5.07% above its 20-Day SMA, 7.58% above its 50-Day SMA, and 8.72% above its 200-Day SMA. MRQ Net Profit Margin increased to 4.06% from 2.65% year-over-year, Sales/Assets increased to 0.29 from 0.27, while Assets/Equity decreased to 3.44 from 4.22. The stock has gained 11.92% over the last year.

11. Abercrombie & Fitch Co. (NYSE:ANF): Operates as a specialty retailer of casual apparel for men, women, and kids. Market cap of $5.61B. Dividend yield at 1.08%, payout ratio at 30.85%. The stock is currently trading at 4.16% above its 20-Day SMA, 4.41% above its 50-Day SMA, and 6.19% above its 200-Day SMA. MRQ Net Profit Margin increased to 3.49% from 2.61% year-over-year, Sales/Assets increased to 0.31 from 0.26, while Assets/Equity decreased to 1.55 from 1.57. The stock has gained 52.36% over the last year.

12. Ross Stores Inc. (NASDAQ:ROST): Operates off-price retail apparel and home accessories stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. Market cap of $9.48B. Dividend yield at 1.07%, payout ratio at 14.78%. The stock is currently trading at 5.93% above its 20-Day SMA, 10.94% above its 50-Day SMA, and 14.35% above its 200-Day SMA. MRQ Net Profit Margin increased to 7.10% from 6.76% year-over-year, Sales/Assets increased to 0.68 from 0.67, while Assets/Equity decreased to 2.14 from 2.27. The stock has gained 48.75% 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.

Source: 12 Rallying S&P 500 Dividend Stocks With Strong Sources Of Profitability