Profitability measures such as return on capital employed (ROCE) are a useful way to gauge the “quality" of company. If a company can generate consistent returns on capital far above the cost of capital, that alone suggests some kind of durable competitive advantage or economic moat.

If the company didn't have a competitive advantage then other companies would copy what it was doing in order to earn those same high rates of return. That in turn would increase competition and decrease profit margins and profitability.

As a defensive value investor I'm interested in combining the defensive investor's love of relatively defensive, high quality companies, with the value investors preference for low prices.

One way to find such companies is to look at very high quality companies, using measures such as profitability or return on capital employed, and then weed out the ones that appear to be too expensive.

In an effort to do that, here are the current top 10 companies from my stock screen as measured by ROCE:

10 most profitable dividend paying shares

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ROCE in this context is in fact the 10-year median net ROCE, where net ROCE is ROCE calculated using post-tax profits rather than operating profits. Doing it that way means that interest payments are factored into the result, so companies with large debt and interest obligations typically have lower net ROCE scores.

Selection criteria

Every one of those 10 companies has a 10-year unbroken record of dividend payments and has produced a 10-year net profit as well (i.e. total profits were more than total losses). But it is possible to be far more selective.

Excluding expensive shares

Generally I don't like to invest in anything where PE10 (share price to 10-year average earnings ratio) is greater than 30. In the table you can see the stocks that fall above that level as their PE10 value is highlighted in bright red.

So using that criterion Micro Focus International, Next, Telecom Plus, Domino's Pizza UK & IRL and Rotork would be considered too expensive, regardless of how quickly they were growing (the Growth column) or how high the consistency or quality of their growth was (the Quality column).

Where PE10 is coloured light red (or pink) its value is less than 30 but higher than…

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