Deep Dive: Among the S&P 500, these 20 companies have made the best use of investors’ money

One way to begin your own research is to consider how well management teams have allocated investors’ capital. According to FactSet, a company’s return on invested capital, or ROIC, is its profit divided by the sum of the carrying value of its common stock, preferred stock, long-term debt and capitalized lease obligations. Below is a list of the 20 companies in the S&P 500
SPX
that have had the highest average ROIC over the past three years. FactSet’s quarterly ROIC calculations are actually a 12-month look back.

ROIC is an annualized figure that sheds light on a management team’s ability to make the most efficient use of the money invested to fund its business. It isn’t a perfect tool to measure performance, in part because different industries are naturally more capital-intensive than others.

Note that the carrying value of a company’s stock may be much lower than its current market capitalization. The company may have issued most of its shares many years ago at a price much lower than today’s. If a company has issued a relatively large amount of newer shares recently, or at high prices, its ROIC will be lower. If a company has low debt, its ROIC is higher. If a company is being forced to increase borrowings, especially as interest rates are rising, its ROIC will go down.

Our previous looks at ROIC have focused on longer periods, including five-year averages for the semiconductor industry in June and 10-year averages for the S&P 500 a year ago. Those looks back were generally correlated with strong investment returns over long periods.

This time we are only looking back at 36 quarters of ROIC for an average, and stock-market performance during this period hasn’t necessarily been correlated with the highest ROIC. Then again, the combination of a high ROIC and poor recent stock performance may set up good entry points for investors who can commit for many years.

Stock screen

For the S&P 500, quarterly ROIC data going back three years is available from FactSet for 492 companies. Companies’ fiscal quarters don’t necessarily match the calendar, and when a company announces its quarterly results with a press release, it may not disclose enough data for FactSet to immediately calculate its ROIC for that quarter. The ROIC for that quarter will become available when the company files its quarterly 10-Q report with the Securities and Exchange Commission.

So for the 492 companies, we looked back at either 12 or 13 quarters to get the three-year average ROIC. Here are the 20 companies that topped the list:

Click on the tickers for more about each company, fund or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

The list is driven by the three-year averages, but it also includes averages for shorter periods, with those for the most recent reported quarter’s ROIC on the right. This can shed more light on the topic. For example, the four-quarter number and the most recent number for Moderna Inc.
MRNA,
-2.61%
underscore how much less profitable the company has become as the COVID-19 pandemic has subsided. The company posted a net loss for the most recent quarter but still ran a four-quarter profit, which drove the ROIC figure. You can also see that Apple Inc.’s
AAPL,
-1.34%
most recent quarterly ROIC is well above all three averages.

Now let’s take a look at total returns and forward price-to-earnings ratios for the group:

Total returns for the S&P 500 are shown at the bottom of the list, for comparison. The full index’s average ROIC for the past three years has been 10.02%, according to FactSet, showing that some industries require more invested capital than others.

Among this list of 20 companies with the highest ROIC over the past three years, only nine have beaten the index’s three-year total return (with dividends reinvested) through Oct. 24. However, the longer the period, the better the high-ROIC group looks. Among the 20 companies, 19 have been around for 10 years, and 17 of those have beaten the index’s return.

Verisign Inc.
VRSN,
-0.14%
has had the highest ROIC for all periods, but its stock hasn’t performed well over the past several years. The company has a dominant market position in internet domain registry services.

It was the fourth-largest holding of the $5.5 billion Delaware Ivy Large Cap Growth Fund IYGIX as of Sept. 30. The fund has a five-star rating, the highest, within Morningstar’s Large Growth fund category.

During an interview with MarketWatch, Brad Klapmeyer, who co-manages the fund, said shares of Verisign had been “under pressure” because of a slowdown in demand for domain registration, following spike during the pandemic. He said that the “churning-out” of domain names following that increase was a “normal part of the cycle.”

He emphasized the durability of Verisign’s business because the cost to companies to have Verisign maintain domain names and “verify the integrity of the internet” is “typically a small piece of the overall cost of a business.”

Verisign has exclusive rights from the U.S. Department of Commerce for the registration of “.com” and “.net” domain names. Klapmeyer doesn’t expect this market advantage to be challenged, despite Verisign’s “strong pricing power and strong competitive position.”

Verisign’s stock hasn’t been a highflier over recent years, but its low-cost business model continues to be reflected in its high ROIC, and the more recent numbers show operating improvement.

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