Sep 20, 2021
Never forget the basics.
While we’re constantly bombarded with confusing investment mumbo jumbo, we should never forget that companies largely exist for one main reason: to take capital from investors and earn a return on it.
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That’s why it makes sense to focus on businesses, with durable competitive advantages, that are able to consistently deliver high returns on capital.
As Berkshire Hathaway CEO Warren Buffett once said, “[T]he best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.”
Here are three companies with returns on invested capital above 20% — they might be worth buying with some of your spare change.
Nike (NKE)
Kicking things off is Nike, which consistently generates returns on invested capital in the range of 25% to 30%.
As the world’s largest athletic footwear company, Nike’s unmatched brand power, economies of scale, and constant innovation allow the company to maintain premium pricing on its products, leading to consistently outsized returns for investors.
In the most recent quarter, for example, Nike’s gross margin increased 850 basis points to 45.8% thanks to higher volume in wholesale shipments and strong pricing in its direct-to-consumer segment.
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“NIKE’s strong results this quarter and full fiscal year demonstrate NIKE’s unique competitive advantage and deep connection with consumers all over the world,” said President and CEO John Donahoe.
Currently, Nike sports a forward P/E of 37, lower than that of competitors Under Armour (65) and Lululemon Athletica (59), but higher than main rival Adidas AG (28).
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Starbucks (SBUX)
Next up, we have Starbucks, which boasts a five-year return on invested capital of 31%, trouncing other major fast-food chains like McDonald’s (20%) and Chipotle Mexican Grill (8%).
Even in the incredibly intense quick-service restaurant space, the specialty coffee chain’s premium-quality positioning and market share dominance allow it to charge significantly higher prices than other chains, leading to consistent above-average returns for shareholders.
And with the company continuing to grow in places like China and Japan, Starbucks should have no shortage of areas to reinvest its capital long-term.
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In the most recent quarter, global same-store sales increased a whopping 73%.
“Our ability to move with speed and agility and to be out in front of shifting customer behaviors has helped further differentiate Starbucks, positioning us well for this moment,” said President and CEO Kevin Johnson.
The stock is off about 12% from its 52-week highs in June and currently trades at a reasonable forward P/E of 30, giving bargain hunters a place to park their digital nickels and dimes.
Alphabet (GOOG)
With a solid trailing-twelve-month return on invested capital average of 25%, tech gorilla and Google search provider Alphabet rounds out our list.
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Alphabet’s absolute dominance in the online search space (global market share above 80%), diversified portfolio of offerings (including Maps, Google Play, YouTube, and Gmail), and constant technological innovation should continue to support strong returns and massive cash flow generation for years to come.
Alphabet’s Q3 results, revenue jumped 62% year-over-year to $62 billion on increased online activity and broad-based advertiser spending.
“In Q2, there was a rising tide of online activity in many parts of the world, and we’re proud that our services helped so many consumers and businesses,” said CEO Sundar Pichai.
Alphabet shares have nearly doubled over the past year and currently trade at a forward P/E of 26.
Read More: Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
Return to earth
Even if you don't agree with Buffett on specific stock picks, you should still look to implement his time-tested strategy of investing in stable assets at discounted prices.
One steady asset that Buffett's good friend Bill Gates is partial to is investing in U.S. farmland.
In fact, Gates is America's biggest owner of farmland and for good reason: Over the years, agriculture has been shown to offer higher risk-adjusted returns than both stocks and real estate.
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Brian is an editor for Moneywise. A long-time stock junkie, his work has appeared in The Motley Fool, Seeking Alpha, and Yahoo Finance. He believes in owning "Forever Stocks" — a rare group of businesses that have paid out dividends for decades. Brian holds the Chartered Financial Analyst (CFA) designation.
