When considering dividend stocks, it is always important to also consider company profitability. After all, profitability is what funds dividend payments.
One way to analyze a company's profits is with DuPont analysis of return on equity (ROE) profitability.
DuPont analyzes ROE (net income/equity) profitability by breaking ROE up into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
We therefore focus on companies with the following positive 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 with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.
To illustrate this idea, we ran DuPont on stocks paying dividend yields above 1% and sustainable payout ratios below 50% that are also reporting their quarterly earnings next week.
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 index over the last month. To access a complete analysis of this list's recent performance, click here.
Do you think these companies have the profit to back up their dividends? Use this list as a starting point for your own analysis.
1. Franklin Electric Co. Inc. (FELE): Engages in the design, manufacture, and distribution of groundwater and fuel pumping systems. Dividend yield at 1.00%, payout ratio at 20.67%. Earnings to be released on 02/21. MRQ net profit margin at 8.57% vs. 6.54% y/y. MRQ sales/assets at 0.266 vs. 0.241 y/y. MRQ assets/equity at 1.857 vs. 1.891 y/y.
2. McGrath Rentcorp (MGRC): Operates as a business-to-business rental company in the United States. Dividend yield at 2.87%, payout ratio at 45.30%. Earnings to be released on 02/22. MRQ net profit margin at 14.63% vs. 11.66% y/y. MRQ sales/assets at 0.117 vs. 0.102 y/y. MRQ assets/equity at 2.794 vs. 2.893 y/y.
3. National Healthcare Corp. (NHC): Operates and manages long-term health care centers, and associated assisted living and independent living centers in the United States. Dividend yield at 2.59%, payout ratio at 28.41%. Earnings to be released on 02/20. MRQ net profit margin at 8.73% vs. 8.45% y/y. MRQ sales/assets at 0.233 vs. 0.22 y/y. MRQ assets/equity at 1.413 vs. 1.473 y/y.
4. Neenah Paper, Inc. (NP): Engages in the production and sale of fine papers and technical products worldwide. Dividend yield at 1.90%, payout ratio at 22.94%. Earnings to be released on 02/20. MRQ net profit margin at 3.83% vs. 2.54% y/y. MRQ sales/assets at 0.304 vs. 0.261 y/y. MRQ assets/equity at 3.09 vs. 3.815 y/y.
5. Southern Union Co. (SUG): Engages in the gathering, processing, transportation, storage, and distribution of natural gas in the United States. Dividend yield at 1.38%, payout ratio at 29.64%. Earnings to be released on 02/20. MRQ net profit margin at 9.4% vs. 7.66% y/y. MRQ sales/assets at 0.075 vs. 0.061 y/y. MRQ assets/equity at 3.134 vs. 3.212 y/y.
*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.