10 Dividend Stocks With Strong Cash Coverage And Sources Of Profitability

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 |  Includes: BAX, DOW, NC, NHC, NOC, PL, SPLS, STLD, UTX, XRX
by: Kapitall

Company profitability is not as straightforward as it often appears to be. Although net income is the popular headline number that analysts follow during earnings season, companies can earn these profits in different ways, with some preferred over others. This is why it is important to also 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 with strong cash coverage, with at least three times the TTM operating cash flow per share vs. TTM dividend per share.

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 point for your own analysis.

List sorted by change in ROE.

1. Steel Dynamics Inc. (NASDAQ:STLD): Engages in the manufacture and sale of steel products in the United States. Market cap of $2.92B. Dividend yield at 3.19%, payout ratio at 32.02%. TTM dividend per share at $0.38 vs. TTM total operating cash flow per share at $1.64. MRQ Net Profit Margin increased to 2.12% from 1.18% year-over-year, Sales/Assets increased to 0.34 from 0.28, while Assets/Equity decreased to 2.61 from 2.68. The stock has had a good month, gaining 16.16%.

2. Nacco Industries Inc. (NYSE:NC): Engages in lift trucks, small appliances, specialty retail, and mining businesses primarily in the Americas, Europe, and the Asia-Pacific. Market cap of $693.17M. Dividend yield at 2.59%, payout ratio at 12.11%. TTM dividend per share at $2.11 vs. TTM total operating cash flow per share at $13.10. MRQ Net Profit Margin increased to 3.12% from 2.03% year-over-year, Sales/Assets increased to 0.47 from 0.41, while Assets/Equity decreased to 3.21 from 3.95. This is a risky stock that is significantly more volatile than the overall market (beta = 2.37). The stock has had a good month, gaining 13.23%.

3. The Dow Chemical Company (NYSE:DOW): Manufactures and supplies products used as raw materials in the production of customer products and services worldwide. Market cap of $31.86B. Dividend yield at 3.85%, payout ratio at 32.23%. TTM dividend per share at $0.80 vs. TTM total operating cash flow per share at $3.19. MRQ Net Profit Margin increased to 5.96% from 4.64% year-over-year, Sales/Assets increased to 0.23 from 0.19, while Assets/Equity decreased to 2.77 from 3.01. This is a risky stock that is significantly more volatile than the overall market (beta = 2.32). The stock has lost 9.5% over the last year.

4. Staples, Inc. (NASDAQ:SPLS): Operates as an office products company. Market cap of $10.21B. Dividend yield at 2.79%, payout ratio at 28.03%. TTM dividend per share at $0.39 vs. TTM total operating cash flow per share at $2.16. 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. Might be undervalued at current levels, with a PEG ratio at 0.81, and P/FCF ratio at 12.58. The stock has lost 26.68% over the last year.

5. Xerox Corp. (NYSE:XRX): Engages in the development, manufacture, marketing, service, and finance of document equipment, software, solutions, and services worldwide. Market cap of $11.12B. Dividend yield at 2.13%, payout ratio at 22.77%. TTM dividend per share at $0.17 vs. TTM total operating cash flow per share at $1.39. MRQ Net Profit Margin increased to 5.73% from 4.61% year-over-year, Sales/Assets increased to 0.1828 from 0.1760, while Assets/Equity decreased to 2.33 from 2.52. Might be undervalued at current levels, with a PEG ratio at 0.66, and P/FCF ratio at 9.37. The stock has lost 26.69% over the last year.

6. Northrop Grumman Corporation (NYSE:NOC): Provides products, services, and solutions in aerospace, electronics, information systems, shipbuilding, and technical service sectors. Market cap of $15.28B. Dividend yield at 3.52%, payout ratio at 30.93%. TTM dividend per share at $1.94 vs. TTM total operating cash flow per share at $7.52. MRQ Net Profit Margin increased to 7.86% from 7.03% year-over-year, Sales/Assets increased to 0.26 from 0.23, while Assets/Equity decreased to 2.10 from 2.29. The stock is a short squeeze candidate, with a short float at 5.4% (equivalent to 5.6 days of average volume). The stock has gained 7.25% over the last year.

7. Protective Life Corp. (NYSE:PL): The company and its subsidiaries engage in the production, distribution, and administration of insurance and investment products in the United States. Market cap of $1.92B. Dividend yield at 3.04%, payout ratio at 15.69%. TTM dividend per share at $0.60 vs. TTM total operating cash flow per share at $7.39. MRQ Net Profit Margin increased to 9.43% from 8.77% year-over-year, Sales/Assets increased to 0.0181 from 0.0175, while Assets/Equity decreased to 12.74 from 12.86. The stock has had a couple of great days, gaining 5.34% over the last week.

8. National Healthcare Corp. (NYSEMKT:NHC): Operates and manages long-term health care centers, and associated assisted living and independent living centers in the United States. Market cap of $574.64M. Dividend yield at 2.90%, payout ratio at 28.41%. TTM dividend per share at $1.16 vs. TTM total operating cash flow per share at $4.68. MRQ Net Profit Margin increased to 8.73% from 8.45% year-over-year, Sales/Assets increased to 0.23 from 0.22, while Assets/Equity decreased to 1.41 from 1.47. The stock is a short squeeze candidate, with a short float at 5.01% (equivalent to 9.2 days of average volume). The stock has had a good month, gaining 12.48%.

9. United Technologies Corp. (NYSE:UTX): Provides technology products and services to the building systems and aerospace industries worldwide. Market cap of $70.18B. Dividend yield at 2.49%, payout ratio at 34.03%. TTM dividend per share at $1.81 vs. TTM total operating cash flow per share at $6.87. MRQ Net Profit Margin increased to 8.94% from 8.80% year-over-year, Sales/Assets increased to 0.24 from 0.22, while Assets/Equity decreased to 2.74 from 2.85. The stock has gained 7.64% over the last year.

10. 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 $30.41B. Dividend yield at 2.66%, payout ratio at 32.39%. TTM dividend per share at $1.24 vs. TTM total operating cash flow per share at $4.95. MRQ Net Profit Margin increased to 16.56% from 16.28% year-over-year, Sales/Assets increased to 0.19 from 0.18, while Assets/Equity decreased to 2.57 from 2.69. The stock has gained 9.19% 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.