Operating margin is the percentage of how much money a company makes for every dollar of sales. Also referred to as operating profit margin, the calculation measures what portion of a company’s revenues are left over once items like wages and materials have been paid for. This is an important ratio for dividend income investors, as a company with a low margin may have trouble paying for fixed costs, such as debt. If a company struggles to pay its debt, then there is little change of dividend growth for shareholders.
Companies with higher percentages are often in much better financial shape than their competitors. This is because these companies are earning more for every dollar of sales, which means they are more efficient. As a dividend investor, the operating profit margin is a critical piece of data that should be used to identify only the best dividend stocks.
How to Calculate Operating Margin
The operating profit margin is calculated by taking the operating income of a company and dividing it by net sales. The percentage can be calculated using the following formula -
Operating Margin Percentage Formula
Operating Margin = Operating Income / Net Sales
Johnson & Johnson (JNJ) a well-known dividend aristocrat recently had an operating profit margin of 26.33%. This means the company makes $0.26 (before interest and taxes) for every dollar of sales.
How to Find the Best Dividend Stocks
A healthy operating profit margin is an important criterion to look for when filtering the best dividend stocks. Here are a few important things to keep in mind when thinking about how much money a company makes on each dollar of sales.
- Compare the margin of competitors within the same industry when looking at dividend stocks.
- Analyze a company’s margin over time. A steadily increasing percentage is a good sign of a healthy company.
- Healthy margins allow a company to pay off debt.
- The higher a stocks margin, the better.
- If the margin is increasing, the company is earning more for every dollar of sales.
The operating margin formula is a great tool to use for investors looking to find the best long term stocks. My stock investing philosophy is to buy only the best dividend paying stocks over the long term – which is why I use the operating margin in my screening process. A company that is efficient and can pay off their debt is much better equipped to withstand any type of economic climate.
Do you use the operating margin to help with your analysis? What percentage do you look for?