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3 Stocks Earning a Strong Return on Invested Capital

A look at three companies creating value for shareholders

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Jan 17, 2022
Summary
  • Altria has the highest value creation in the tobacco industry. The company also has more than five decades of dividend growth.
  • Amgen's value creation has enabled strong dividend growth rates over the last decade.
  • McDonald's has a leading value creation score in its industry and close to 50 years of dividend growth.
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One way to identify high-quality companies is to consider their return on invested capital. The companies that can turn invested dollars into profits will likely see an increase in earnings per share, which can send share prices higher.

At the same time, the company’s weighted average of cost of capital should also be considered. Companies with lower a WACC shows that costs of investing in the company’s operations aren’t offsetting gains made from the return on invested capital. Companies with ROIC above WACC mean that they are creating value.

For example, if a company has a ROIC of 20% and WACC of 10%, then it has produced 10 cents of value for every dollar that is invested into the business.

We will look at three companies with ROICs of at least 16%, WACCs below 5%, offer a market-beating dividend yield and are considered to be trading near intrinsic value.

Altria

The first name to consider is Altria Group Inc. (

MO, Financial), a leading tobacco manufacturer. The company sells its brands, which include Marlboro, Skoal and Copenhagen, throughout the U.S. Altria is valued at $93 billion and generates annual revenue approaching $21 billion.

Altria has a five-year median ROIC of 16.1% and a WACC of 4.8%, meaning the company is generating more than 11 cents of value for every dollar invested in the business. This is the best performance amongst the companies in the tobacco industry.

Given how successful the company has been at making strategic investments in its business, its is no wonder that Altria’s earnings per share have a compound annual growth rate of 11.5% for the 2011 to 2020 time period. This is the best performance among companies meeting the criteria in the tobacco sector.

Turning invested dollars into profits has enabled Altria to grow its dividend for 52 consecutive years, making the company one of just 35 Dividend Kings in the market place. The dividend has a compound annual growth rate of 8.4% over the last decade.

Shares yield 7.1%, more than five times the average yield of the S&P 500 Index. Altria has long been a high-yielding stock, but the current yield is above the 10-year average of 5.4%.

Altria trades at just over 11 times earnings estimates for 2021. This is well below the 10-year average price-earnings ratio of 16.4.

The GF Value Line shows the stock is trading close to its intrinsic value.

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Altria closed Friday’s trading session at $50.81. The stock has a GF Value of $48.53, giving it a price-to-GF Value of 1.05. Altria is rated as fairly valued by GuruFocus.

Amgen

Next up is Amgen Inc. (

AMGN, Financial), a leading biotech company. The company has products that address a variety of therapeutic areas, including oncology, cardiovascular disease and inflammation. The $133 billion company has annual revenue of more than $25 billion.

Amgen’s five-year median ROIC is 20.9% while the WACC is 4.8%. As a result, Amgen has created more than 16 cents of value per dollar invested over this period of time. There aren’t too many health care companies with better value creation.

This is why the company’s earnings per share have a CAGR of 13.6% over the last decade. Share repurchases have aided results during this period of time as Amgen has retired an average of 3.5% of the share count per year. Still, net profit has grown nearly 6% annually since 2011.

Long-term growth has provided Amgen the ability to grow its dividend for the past 11 years. Dividend growth has been aggressive at more than 19% annually during the last 10 years. The pace of the increase has slowed over the last five years, but has remained fairly strong at 11%. Shares of the company yield 3.3%, which is 100 basis points better than the stock’s 10-year average yield of 2.3%.

The stock is trading at 14 times earnings estimates for the year, slightly ahead of the long-term average price-earnings ratio of 13.4.

On the other hand, the GF Value Line shows the stock is trading below intrinsic value.

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With a recent price of $235.36 and a GF Value of $256.24, Amgen has a price-to-GF Value of 0.92. The stock is rated as fairly valued, but would provide a 9% return if it were to trade with its GF Value. Add in the dividend and total returns could extend into the low double-digit range.

McDonald’s

The third name on this list is McDonald’s Corp. (

MCD, Financial), which is a leading foodservice retailer. The company has almost 40,000 locations worldwide. McDonald’s is valued at $193 billion and generates revenue of $19 billion annually.

McDonald’s median ROIC over the last half-decade is 18.3%. The company has a WACC of 5%, resulting in more than 13 cents of value creation for every dollar invested in the business. Of the names in the restaurant industry, only Domino’s Pizza Inc. (

DPZ, Financial) has a better value creation metric.

The company's earnings per share have a CAGR of just 1.5% over the last decade. This is due, in large part, to the performance during worst of the Covid-19 pandemic. For the decade prior to 2020, the earnings growth rate was 6.1%.

The company is quickly approaching five decades of dividend growth. Following a 7% increase at the end of 2021, McDonald’s dividend growth streak sits at 46 years. The most recent increase matches the dividend’s CAGR over the last decade. McDonald’s yields 2.1%, which is lower than the stock’s long-term average of 2.9%, but better than what the market index is paying.

McDonald’s trades at more than 27 times estimates for 2021, a premium to the historical average of 21.3 over the past decade.

However, shares look more reasonably valued using the GF Value Line.

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With a current price of $257.71 and a GF Value of $238.04, McDonald’s has a price-to-GF Value of 1.08. The stock is rated as fairly valued by GuruFocus.

Final thoughts

Using ROIC and WACC can help an investor determine which companies are best at turning invested dollars into value creation. These companies tend to see earnings grow over time. Altria, Amgen and McDonald’s are three names with very high valuation creation.

Each name also provides a generous dividend and at least a decade of dividend growth. Altria and McDonald’s, in particular, have very long histories of raising dividends. All three stocks are rated as fairly valued as they trade close to their intrinsic values.

For investors looking for companies creating value, Altria, Amgen and McDonald’s are three names to consider.

Disclosures

I am/ we are currently short the stocks mentioned. Click for the complete disclosure
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