Valuation, Dividend Safety, and Asset Turnover of Two Distributors
An investor is comparing two publicly traded distributors, Calder Supply and BrightLine Goods, for a retirement account. Calder has net income of $2.4 million, 1.2 million shares outstanding, a market price of $28 per share, annual dividends of $0.84 per share, sales of $18 million, and total assets of $12 million. BrightLine has net income of $3.6 million, 2.0 million shares outstanding, a market price of $41 per share, annual dividends of $1.23 per share, sales of $30 million, and total assets of $15 million. Both have no preferred stock. The investor wants income and reasonable valuation but also cares about how hard each company's asset base works. She has a one-year horizon and is wary of a company that is paying out more of its earnings than it can sustain. She asks you to compute earnings per share, price-to-earnings ratio, dividend yield, dividend payout ratio, and asset turnover before deciding.
1. Compute EPS, P/E, dividend yield, and dividend payout ratio for each company.
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Calder Supply: EPS = net income / shares = $2.4 million / 1.2 million = $2.00. P/E = price / EPS = $28 / $2.00 = 14.0. Dividend yield = dividend / price = $0.84 / $28 = 0.030 = 3.0%. Payout ratio = dividend / EPS = $0.84 / $2.00 = 0.42 = 42%.
BrightLine Goods: EPS = $3.6 million / 2.0 million = $1.80. P/E = $41 / $1.80 = 22.78. Dividend yield = $1.23 / $41 = 0.030 = 3.0%. Payout ratio = $1.23 / $1.80 = 0.6833 = 68.3%.
Both offer the same 3.0% dividend yield. Calder trades at a much lower P/E and pays out a smaller share of earnings, leaving more cushion.
2. Compute asset turnover and net profit margin, and explain what the two ratios reveal.
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Asset turnover = sales / total assets. Calder = $18 million / $12 million = 1.50. BrightLine = $30 million / $15 million = 2.00.
BrightLine generates $2.00 of sales per $1.00 of assets; Calder generates $1.50. BrightLine works its asset base harder.
Net profit margin = net income / sales. Calder = $2.4 / $18 = 0.1333 = 13.33%. BrightLine = $3.6 / $30 = 0.1200 = 12.00%.
The pattern is complementary: Calder earns a higher margin on each sales dollar but has lower turnover; BrightLine has higher turnover but a lower margin. Return on assets combines both: Calder = $2.4 / $12 = 20.0%; BrightLine = $3.6 / $15 = 24.0%. BrightLine is more efficient overall, but not because of margin.
3. Recommend one company for a one-year income-focused investor, and identify the tradeoffs.
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BrightLine has the better asset turnover, 2.00 versus 1.50, and the higher return on assets, 24.0% versus 20.0%. It is operationally efficient. However, it trades at 22.78 times earnings versus 14.0 for Calder and pays out 68.3% of earnings versus 42%. A high payout is not automatically unsafe, but it leaves less room to absorb an earnings decline.
Calder offers the same 3.0% dividend yield at a lower valuation and with a lower payout ratio. Its 13.33% net margin also gives it more cushion per sales dollar. For an investor with a one-year horizon who wants income and reasonable valuation, Calder is the more conservative choice: cheaper earnings, safer coverage of the dividend, and comparable current yield.
BrightLine is not disqualified. If the investor prioritizes operating efficiency and believes its earnings are stable, the higher ROA and turnover are attractive. The decision depends on whether the 68.3% payout is sustainable; the investor should check debt levels, cash flow, and industry conditions before choosing. On the data given, Calder is the better fit for income with valuation discipline.