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When evaluating dividend stocks, profitability analysis is very important to ensure that a stock’s dividend yield appears sustainable.

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 also 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 champions, stocks that have consistently raised 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.



Do you think these stocks pay reliable dividends? Use this list as a starting-off point for your own analysis.

List sorted by change in ROE.

1. Raven Industries Inc. (NASDAQ:RAVN): Manufactures products for industrial, agricultural, construction, and military/aerospace markets in North America. Market cap of $1.05B. Dividend yield at 1.24%, payout ratio at 25.91%. MRQ Net Profit Margin increased to 13.79% from 11.41% year-over-year, Sales/Assets increased to 0.43 from 0.38, while Assets/Equity decreased to 1.2876 from 1.2917. The stock has had a couple of great days, gaining 16.4% over the last week.

2. Dover Corp. (NYSE:DOV): Manufactures and sells industrial products and components, and consumables. Market cap of $10.06B. Dividend yield at 2.33%, payout ratio at 24.26%. MRQ Net Profit Margin increased to 11.58% from 9.51% year-over-year, Sales/Assets increased to 0.23 from 0.22, while Assets/Equity decreased to 1.93 from 1.98. The stock has had a couple of great days, gaining 10.41% over the last week.

3. Air Products & Chemicals Inc. (NYSE:APD):
Provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. Market cap of $17.65B. Dividend yield at 2.80%, payout ratio at 39.27%. MRQ Net Profit Margin increased to 12.67% from 11.24% year-over-year, Sales/Assets increased to 0.18 from 0.17, while Assets/Equity decreased to 2.32 from 2.48. The stock has gained 2.45% over the last year.

4. Parker Hannifin Corporation (NYSE:PH):
Manufactures fluid power systems, electromechanical controls, and related components. Market cap of $11.02B. Dividend yield at 2.03%, payout ratio at 19.33%. MRQ Net Profit Margin increased to 8.57% from 7.97% year-over-year, Sales/Assets increased to 0.31 from 0.28, while Assets/Equity decreased to 2.02 from 2.27. The stock has had a couple of great days, gaining 12.09% over the last week.

5. PPG Industries Inc. (NYSE:PPG):
Manufactures and supplies protective and decorative coatings. Market cap of $12.25B. Dividend yield at 2.93%, payout ratio at 34.59%. MRQ Net Profit Margin increased to 8.53% from 7.87% year-over-year, Sales/Assets increased to 0.2611 from 0.2587, while Assets/Equity decreased to 3.77 from 3.87. The stock has had a couple of great days, gaining 6.87% over the last week.

6. Emerson Electric Co. (NYSE:EMR):
Operates as a diversified manufacturing and technology company. Market cap of $34.65B. Dividend yield at 2.97%, payout ratio at 43.47%. MRQ Net Profit Margin increased to 10.86% from 10.80% year-over-year, Sales/Assets increased to 0.26 from 0.24, while Assets/Equity decreased to 2.22 from 2.57. The stock has had a couple of great days, gaining 7.53% over the last week.

7. National Fuel Gas Co. (NYSE:NFG):
Operates as a diversified energy company primarily in the United States. Market cap of $4.39B. Dividend yield at 2.68%, payout ratio at 45.20%. MRQ Net Profit Margin increased to 12.31% from 12.10% year-over-year, Sales/Assets increased to 0.0742 from 0.0711, while Assets/Equity decreased to 2.77 from 2.84. The stock has had a couple of great days, gaining 7% over the last week.

8. Donaldson Company, Inc. (NYSE:DCI):
Engages in the manufacture and sale of filtration systems and replacement parts worldwide. Market cap of $4.43B. Dividend yield at 1.01%, payout ratio at 18.96%. MRQ Net Profit Margin increased to 10.52% from 9.93% year-over-year, Sales/Assets increased to 0.36 from 0.34, while Assets/Equity decreased to 1.85 from 2.01. The stock has had a couple of great days, gaining 5.72% over the last week.

9. HB Fuller Co. (NYSE:FUL):
Formulates, manufactures, and markets adhesives, sealants, paints, and other specialty chemical products worldwide. Market cap of $952.58M. Dividend yield at 1.55%, payout ratio at 16.90%. MRQ Net Profit Margin increased to 5.99% from 5.61% year-over-year, Sales/Assets increased to 0.30 from 0.29, while Assets/Equity decreased to 1.72 from 1.98. The stock has had a couple of great days, gaining 5.74% over the last week.

10. 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 $14.35B. Dividend yield at 1.93%, payout ratio at 43.15%. 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 gained 58.61% over the last year.

11. Hormel Foods Corp. (NYSE:HRL):
Produces and markets various meat and food products in the United States and Internationally. Market cap of $7.64B. Dividend yield at 1.77%, payout ratio at 27.20%. 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 7.1 days of average volume). The stock has had a couple of great days, gaining 5.07% 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.

Source: 11 Dividend Champions With Strong Sources Of Profitability