One of the most useful approaches to using the Gross Profitability Ratio is comparing stocks in the same industry. This ratio is gaining popularity because studies have shown that it is a good predictor of future performance.
Gross Profitability = Gross Profits / Total Assets
Our parent blog, the Arbor Investment Planner has a great in-depth post on the subject for those who desire to know more about this valuable ratio:
Gross Profitability Ratio – The New Magic Formula?
There are several useful approaches to using the Gross Profitability Ratio. Here are three examples:
- Compare the Gross Profitability of a list of bargain dividend stocks (i.e. Bargain Dividend Stocks – Screening For Quality)
- – Screen a specific group of stocks (i.e. 5 Dividend Kings With Highest Gross Profitability)
- – Comparing stocks in the same industry. This is the approach we are going to use in this post.
When comparing companies in different industries you might need to make allowances when making comparisons. For instance a retailer might need fewer assets than a utility to produce the same amount of profits.
The “cleanest”or most accurate use of the Gross Profitability Ratio is to compare stocks that are similar; for example, companies in the same industry. The idea is that these companies might have similar needs for assets (the denominator in gross profitability ratio) and face similar conditions that affect their gross profits (the numerator).
Here are 20 Industrial Stocks from the Arbor Dividend Analyzer data base sorted by Gross Profitability Ratio.
Industrial Stocks Sorted by Gross Profitability Ratio
(updated November 2015)
Div. Yield EV to EBIT GP Ratio
FedEx (FDX) 0.6% 24.3 108%
3M (MMM) 2.5% 15.1 45%
Emerson Electric (EMR) 3.8% 8.7 41%
Illinois Tool Works (ITW) 2.2% 13.0 35%
Cummins (CMI) 3.1% 7.7 32%
Dover (DOV) 2.5% 12.1 32%
Stanley Black & Deck.(SWK) 2.0% 15.6 26%
CSX (CSX) 2.5% 9.6 24%
Parker-Hannifin (HP) 2.4% 11.1 24%
ITT (ITT) 1.2% 8.3 24%
Waste Management (WM) 2.8% 14.5 23%
United Technologies (UTX) 2.5% 11.1 19%
General Dynamics (GD) 1.8% 11.0 19%
Caterpillar (CAT) 4.0% 14.6 18%
Deere (DE) 3.1% 14.2 16%
Boeing 2.5% 11.9 15%
Auto. Data Processing (ADP) 2.3% 18.4 13%
General Electric (GE) 3.1% 20.4 12%
L-3 Communications (LLL) 2.1% 28.4 7%
If you find stocks with a high Gross Profitability Ratio and a low Enterprise Value Ratio , you have a great candidate for further research. In the above list, Emerson Electric (EMR) and Cummins (CMI) stand out because they are near the top of the list, have above average dividend yields, and low EV to EBIT ratios. Some of the other stocks are two or three times as expensive as these two stocks.
The goal of our dividend growth research is to find quality stocks at prices that offer a margin of safety . We want to buy at prices that offer a high probability of an above average return. That usually requires buying at a low price. If you pay a low price, and buy quality at the same time, your probability of success increases exponentially.
Position Disclosures:
Arbor Dividend Value Builder Portfolio (ADVBP) – Long: EMR, PH
Arbor Asset Allocation Model Portfolio (AAAMP) – None
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