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Return on invested capital, commonly known as ROIC, is a valuable financial metric, which can help investors identify some of the highest-quality stocks in the investing universe. ROIC is the ratio of the after-tax operating profit of a company to the sum of its cost of debt and equity capital. Once ROIC is calculated, it is compared to the weighted average cost of capital of the company, known as WACC. The wider the spread between ROIC and WACC the more efficient the company is in allocating its capital. As high-ROIC stocks greatly allocate the capital of their shareholders, they are among the highest-quality stocks in the stock market. In this article, we will analyze 2 of the 10 highest-ROIC stocks, AutoZone (AZO) and Yum Brands (YUM).

AutoZone

AutoZone is the leading retailer of auto parts and accessories in the U.S. It currently has more than 6,000 stores in the U.S., Mexico, and Brazil.

AutoZone has repeatedly proved one of the most resilient companies to recessions. During rough economic periods, sales of new cars decrease significantly, and thus the average age of the existent vehicles increases. As old cars need repair and maintenance more often than new cars, an increase in the average age of vehicles is a tailwind for the business of AutoZone.

In the Great Recession, most companies saw their earnings plunge but AutoZone grew its earnings per share by 18% in 2008 and by another 17% in 2009. A similar trend has been evidenced throughout the coronavirus crisis. In fact, AutoZone greatly benefited from the lockdowns imposed in 2020-2021 and the work-from-home model, which resulted in reduced mobility of a great number of vehicles. Reduced mobility resulted in a steep increase in the demand for repairs.

Moreover, AutoZone has greatly benefited from the unprecedented fiscal stimulus packages offered by the government, which has greatly increased the discretionary income of consumers. The benefit of the pandemic on the business AutoZone has been evident in its results. In fiscal 2021, which ended in August-2021, AutoZone grew its earnings per share by 32%, from $71.93 to a new all-time high of $95.19.

Even better, despite fears that the tailwinds from the fiscal stimulus packages and the pandemic will attenuate, the business momentum of AutoZone has remained intact. In the most recent quarter, the company grew its revenue 16% and its earnings per share 49% over the prior year’s quarter, from $14.93 to $22.30. It thus exceeded the analysts’ estimates by an impressive $4.70 and is on track to grow its earnings per share by another 17% this year.

Notably, AutoZone has exceeded the analysts’ earnings-per-share estimates by a wide margin for 16 consecutive quarters. This is a testament to the strength of its business model, its sustained business momentum, and its exemplary management.

Management has proved exemplary in rewarding the shareholders. It has repurchased shares consistently, even during recessions, in sharp contrast to most companies, which suspend share repurchases during downturns. In this way, AutoZone has greatly enhanced shareholder value. Since 2012, the auto parts retailer has reduced its share count by 42% and has grown its earnings per share every single year, at a 16.8% average annual rate. This helps explain why AutoZone has outperformed the S&P 500 by an outstanding margin over the last decade (+412% vs. +217%). While the business momentum of AutoZone will probably decelerate at some point in the near future, this exceptional stock is likely to continue offering excessive returns to its shareholders in the long run.

Yum Brands

Yum Brands owns the KFC, Pizza Hut, Taco Bell, and The Habit Restaurants chains. It is present in more than 155 countries and has more than 53,000 restaurants, 60% of which are located abroad. KFC generates about half of the total revenue and operating profit of the company.

Yum Brands completed its major 3-year transformation project in 2019. It spun off its Chinese segment and refranchised most of its stores, raising the portion of franchised stores from 77% in 2016 to 98% now. Yum Brands used the proceeds from the sale of its stores to franchisees to repurchase its shares aggressively. In addition, thanks to the refranchising, the company has become more efficient, with much lower operating expenses and a wider operating margin. The transformation of Yum Brands has greatly rewarded its shareholders. To be sure, the stock has more than doubled over the last six years.

Moreover, Yum Brands has proved resilient throughout the coronavirus crisis. Due to the extended lockdowns imposed in several countries in response to the pandemic, it would be natural to expect the company to suffer from the pandemic. However, Yum Brands adjusted immediately to the downturn and switched to an off-premise environment, with a focus on deliveries and drive-thru options. As a result, it outperformed its competitors in business performance by a wide margin. While McDonald’s (MCD) and Restaurant Brands International (QSR) saw their earnings per share decrease by approximately 20% in 2020, Yum Brands grew its earnings per share by 2% in that year.

Moreover, business momentum has accelerated in recent quarters. In the fourth quarter of 2021, the restaurant chain grew its revenue 9% over the prior year’s quarter thanks to 5% same-store sales growth and 4% growth of store count. Its adjusted earnings per share dipped 12% due to increased general and administrative expenses as well as company restaurant expenses. However, this headwind is likely to prove short-lived.

It is also important to note that Yum Brands opened a record number of 1678 gross new restaurants during the fourth quarter. This rate bodes well for the future growth prospects of the company. In addition, the annual digital sales of Yum Brands exceeded $22 billion for the first time.

Yum Brands has promising growth prospects ahead, as it expects to grow its store count by 4%-5% per year on average in the upcoming years. Given also its high-quality management, which has greatly rewarded shareholders via the aforementioned transformation and solid business execution, the stock is highly attractive for the investors who can maintain a long-term horizon.

Final Thoughts

High-ROIC stocks are best-of-breed stocks, which invest the capital of their shareholders in an exemplary way. AutoZone and Yum Brands are testaments to this investing criterion, as they have offered exceptional returns to their shareholders over the last decade. Investors should purchase these two high-quality stocks and keep them in their portfolios with a long-term perspective.