Profitability is one of the most important considerations in choosing among stocks, but how do you compare profitability among peers? One idea is to use DuPont analysis of return on equity. To illustrate, we ran a screen.
We began with a universe of life insurance stocks and then analyzed these companies' profitability by running DuPont analysis on the names. DuPont analyzes profitability by breaking up return on equity (net income/equity) into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Because increases in net margin and asset turnover are considered good things, DuPont focuses on companies with these 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)
Those companies that pass DuPont are seeing positive trends in the sources of their increasing profitability, which adds further weight to the idea that the names are profitable.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
Tool provided by Kapitall (kapitall.com).
Do you think these stocks are headed in the right direction? Use this list as a starting point for your own analysis.
List sorted by MRQ ROE.
1. Torchmark Corp. (TMK): Provides individual life and supplemental health insurance products, and annuities to middle income households. Market cap at $4.95B, most recent closing price at $51.90. MRQ net profit margin at 13.22% vs. 12.08% y/y. MRQ sales/assets at 0.054 vs. 0.053 y/y. MRQ assets/equity at 4.365 vs. 4.378 y/y.
2. Protective Life Corp. (PL): Engages in the production, distribution, and administration of insurance and investment products in the United States. Market cap at $2.55B, most recent closing price at $29.68. MRQ net profit margin at 10.4% vs. 7.03% y/y. MRQ sales/assets at 0.018 vs. 0.018 y/y. MRQ assets/equity at 14.085 vs. 16.277 y/y.
3. Symetra Financial Corporation (SYA): Operates as a financial services company in the life insurance industry in the United States. Market cap at $1.48B, most recent closing price at $12.46. MRQ net profit margin at 13.89% vs. 10.89% y/y. MRQ sales/assets at 0.019 vs. 0.019 y/y. MRQ assets/equity at 9.048 vs. 10.869 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.