Return on assets is one way investors can find high-quality companies as this tool measures how profitable a company is relative to its total assets. ROA helps investors identify how efficient leadership teams are at generating earnings using a company’s assets. For example, if a company has net income of $100 million and assets of $1 billion, then it has a ROA of 10%.
Generally speaking, a good ROA is 5% or better, but a percentage in the double digits could mean that the company is among the best in its industry at generating income from its assets.
We will look at three companies with a 10-year median ROA of at least 10% and a dividend of at least 2%. All three names are also trading below their intrinsic value as well.
C.H. Robinson
C.H. Robinson Worldwide Inc. (CHRW, Financial) is a leading third-party logistics company. The company provides services such as freight, transportation, transportation management and warehousing. C.H. Robinson generated revenue of more than $16 billion last year and has a market capitalization of $12.5 billion.
C.H. Robinson has tended to generate a high ROA over the last decade, with the median score coming in at just under 15%. This compares very well to the company’s peer group. In fact, the only other industrial name that meets the criteria discussed at the open is 3M Co. (MMM, Financial), which has a 10-year median ROA score of 13.9%.
The company has used this double-digit ROA to help grow earnings per share at a rate of 3.6% annually from 2011 through 2020. The Covid-19 pandemic was a meaningful headwind to operations last year as earnings per share fell more than 11% from the previous period. For the 10-year period before the pandemic, the earnings per share growth rate was 6%. Wall Street analysts expect that C.H. Robinson will earn $5.10 in 2021, which would be a 37% improvement from the prior year.
C.H. Robinson closed Friday’s trading session at $93.78, which gives the stock a forward price-earnings ratio of 18.6 using analysts’ estimates. Shares of the company have traded with an average price-earnings ratio of 21 since 2011, so the stock is attractively valued on a historical basis.
Shares of the company also look inexpensive using GuruFocus’ estimate of intrinsic value, or GF Value.
C.H. Robinson has a GF Value of $99.64, equating to a price-to-GF Value of 0.94. Reaching the GF Value would result in a 6.2% gain in the share price. Also adding to total returns would be the stock’s dividend. C.H. Robinson, which has raised its dividend for 22 consecutive years, has a current yield of 2.2%. Total returns could push into the high single-digit range.
Over the long term, C.H. Robinson has a very high ROA. This has powered solid earning’s growth prior to last year. The company is expected to rebound this year, demonstrating the strength of its business. Investors looking for an industrial name with solid total return potential could do well owning shares of C.H. Robinson.
Erie
Erie Indemnity Co. (ERIE, Financial) is a management services company that provides life, auto, home and commercial insurance. The company produced revenue of $2.5 billion last year and is valued at just under $9 billion.
Erie has a median ROA of 12.5% since 2011, making it one of just a handful of names in the financial industry that meet the perimeters for this discussion. Erie is also the lone insurance name meeting all requirements.
The ability to generate profits from assets has allowed the company’s earnings per share to compound at a rate of 6.3% over the last decade. As with C.H. Robinson, the Covid-19 pandemic weighed on Erie’s results last year. Looking at the 2010 to 2019 period, earnings per share had a compound annual growth rate of 7.7%. Analysts believe earnings per share will improve 3.7% this year to $5.82, which would be Erie’s second-best performance in at least a decade.
The stock closed the trading week at $192.11. Using analysts’ estimates for the year, Erie has a forward price-earnings ratio of 33. On the surface, this looks like an expensive valuation, especially for an insurance company. However, the stock has trade with an average price-earnings ratio in the mid-20s for much of the past 10 years, so shareholders are used to paying a premium for Erie.
The stock looks much better from a valuation standpoint when using the GF Value.
Erie has a GF Value of $201.21 at the moment, which results in a price-to-GF Value of 0.95. This implies a potential return of 4.7%. The stock’s dividend yield is 2.2% presently, which could mean total returns of the mid-single-digit variety.
Total returns for the stock might not be the most impressive, but Erie is a very stable company that has produced robust ROA for the last decade. The company also has an impressive dividend growth streak of more than three decades going, proving that it is a solid income option. For investors looking for stability, Erie appears to be a strong candidate for purchase.
Intel
Intel Corp. (INTC, Financial) is the world’s largest manufacturer of microprocessors for PCs. The company also has a significant cloud computing business and provides the servers and storage devices needed in the space. Intel had revenue of $78 billion last year and is valued at $226 billion.
Intel’s median ROA over the last 10 years is 13.4%. The only other technology name with at least a double-digit ROA and a 2%-plus dividend yield is International Business Machines Corp. (IBM, Financial). IBM’s median ROA of 10.2% barely crosses the double-digit threshold.
A strong ROA has helped Intel to grow its earnings per share by 8.3% annually over the last decade. The pandemic was actually a tailwind to the company’s results in 2020 as earnings per share improved 8.6% year over year. Analysts surveyed by Yahoo Finance expect earnings per share to decline 13% to $4.62 this year, but this would be the company’s third-best ever result after 2019 and 2020.
Shares of the company trade hands at $56.76, giving Intel a forward price-earnings ratio of 12.3. This is slightly ahead of Intel’s average price-earnings ratio of 11.5 since 2011.
Intel does offer solid upside potential relative to its GF Value.
GuruFocus estimates Intel’s GF Value at $62.25. With a price-to-GF Value of 0.91, shares could return 9.7% from current levels. Intel’s 2.5% dividend yield would push total return potential into the low double-digit range.
Intel has a strong track record of high ROA and the company’s bottom line has experienced solid growth over the last decade. Intel also offers a higher-than-usual yield for a technology company, even if its current dividend growth streak only stretches back seven years. The combination of high ROA and income might make Intel attractive to investors.
Final thoughts
C.H. Robinson, Erie and Intel are three companies that have demonstrated they are very efficient at using assets to create earnings over a long period of time. Each name outperforms most, if not all, of its respective peer group.
All three names have proven successful at growing earnings per share at a solid rate while offering a market beating dividend yield.
C.H. Robinson, Erie and Intel also appear to be undervalued using intrinsic value and could provide decent total returns for investors buying the stock today.
