The two main benefits of owning common shares of a publicly-traded corporation are:

Accordingly, a company’s ability to use its assets to generate earnings is very important.

How do we measure this?

There are a number of financial metrics that investors use to measure a company’s profitability. These include:

All else being equal, higher profitability metrics should result in superior long-term total returns. This means that investing in highly profitable businesses has merits as part of a holistic investment strategy.

With that in mind, this article will compute rankings based on the five profitability metrics listed above using a group of the most high-quality businesses around – the Dividend Aristocrats.

Profitability By Gross Profit Margin

Gross margin measures the markup between the direct cost of delivering goods or services and the price it is sold for. It does not account for generalized business expenses such as salaries, interest, taxes, or office supplies. Gross margin is also called gross profit margin.

The equation for gross profit margin can be seen below.

Gross profit is defined as revenue minus the cost of goods sold. The exact implications of this definition will vary slightly depending on what type of business you are analyzing – a merchandising company, a services company, or some combination of the two.

For a merchandising company, gross profit is the difference between the price paid for a product when purchased from a supplier and the price the company sells it for to a customer.

Mathematically, gross profit is computed as:

Using this definition of gross profit, we can rewrite the original definition for gross profit margin as follows:

The nature of gross profit margin calculations suggests that companies with the highest product markups – think luxury merchandisers, bottled water, prescription drugs, etc. – should have the highest gross margins. Let’s see if the data supports this hypothesis.

Here are the 10 Dividend Aristocrats with the highest gross margins:

Source: YCharts

The Dividend Aristocrat with the highest net margin is T. Rowe Price Group (TROW).

T. Rowe Price is a global asset management firm with more than $800 billion in assets under management.

The asset management industry has very attractive economics because assets under management – their main source of revenue – has the capability to increase at a much faster pace than fixed expenses, which increases gross margin over time. This has likely helped T. Rowe Price’s ranking above.

The next two Dividend Aristocrats with the highest gross margins are AbbVie (ABBV) and Consolidated Edison (ED).

AbbVie is a pharmaceutical company that manufactures and sells prescription drugs, most notably Humira, the highest-grossing drug in the world. Because of the high markups of prescription drugs, it is unsurprising that AbbVie has high gross margins.

Consolidated Edison is a regulated utility. The company buys energy and transports it to consumers. The high barriers to entry and regulatory scrutiny of Con Ed’s industry are two contributors to the company’s healthy gross margin.

Performing qualitative analysis on the remaining 7 companies in the table above reveals similar observations – there are noticeable characteristics about each business that help to generate high gross margins.