In his 1997 book Guns, Germs, and Steel, Jared Diamond explores the reasons why certain societies have thrived throughout history while others did not. Among the many different reasons Diamond explores, one explanation offered is that different staple crops made life harder or easier for different peoples. Very simply put, the amount of calories and protein yielded from one acre of wheat is much higher, and the labor necessary to grow and harvest it much lower, than other staple crops like taro or sorghum.
When multiplied over thousands of years, the greater nutritional value of wheat or barley combined with the reduced labor to harvest them allowed civilizations relying on them as staple crops to invest time, effort, and resources into other endeavors and helped them grow.
And this applies to equities how? One could say that the benefits of wheat and barley are in the margins. Greater yields from lower work make for better results and more resources to use elsewhere. Publicly traded companies are in a similar situation. Spending lower portions of profit on costs makes for healthier companies and allows them to spend those profits elsewhere; ideally, if you’re a shareholder, on a healthy dividend.
Gross Margins and Operating Margins
There are two measurements of margins that are most commonly considered when reviewing stocks: gross margins and operating margins. Gross margins, calculated by taking total revenues minus the costs of goods sold and then dividing that figure by total revenue, measures what percentage of a company’s sales represent profit after removing the cost of the products. Operating margins, meanwhile, measure what portion of a company’s revenue is left after paying for all operating costs and is calculated by dividing total operating income by net sales.
So, here are five companies that have a gross margin exceeding 50 percent, an operating income over 25 percent, and are using those strong margins to support healthy dividend yields.
TAL International Group (TAL)
TAL International is a rental and lease company that specializes in intermodal containers and chassis. Basically, it rents out the metal containers that goods are hauled in on the back of semi trucks across the country. TAL offers up several strong valuations, with a PEG under 1, P/E of just over 10, and a forward P/E of just over 9, but the margins are what could make the company most appealing to some. TAL’s gross margin is over 85 percent while its operating margin is approaching 60 percent. Combine this with a dividend yield of just over 6 percent and some investors might see a solid chance for returns in TAL.
El Paso Pipeline Partners (EPB)
El Paso Pipeline Partners is an oil and gas company that owns and operates pipelines and storage assets in the Western United States. El Paso has some troubling valuations, with a PEG of 6.75 and a debt/equity ratio over 2, but the gross and operating margins both offer reasons for thinking the future could be brighter than the present for the company. The company’s gross margin is over 70 percent while the operating margin is over 50 percent, both figures supporting a dividend yield of almost 5.5 percent.
National CineMedia (NCMI)
National CineMedia operates in-theater digital entertainment and derives its revenue through selling advertising. The company’s been losing ground over the last year, with share prices falling over 30 percent since January of 2011. However, National CineMedia’s operating margin of over 40 percent, gross margin close to 70 percent, and dividend yield of 6.47 percent could make it an attractive investment for some in the long term.
Natural Resource Partners (NRP)
Natural Resource Partners had a rough 2011, losing 15 percent of its share value since January of last year. It’s a coal mining company with assets throughout Appalachia, Illinois, and Montana. Natural Resources Partners has some appealing metrics, with a gross margin of over 99 percent and a dividend yield of 7.84 percent, and also features an operating margin of over 40 percent.
Linn Energy (LINE)
Linn Energy is an independent oil and gas company with properties throughout the United States. Linn had a volatile 2011, plunging sharply in early August and early October before recovering and showing only a marginal decline on the year. Linn has some troubling aspects of its valuations, with a PEG over 2 and a P/C ratio exceeding 540, but its margins are more than healthy, with a gross margin over 85 percent and an operating margin over 40 percent, and a dividend of of 7.43 percent.