Image Source: Unsplash

Return on invested capital, or ROIC, is a popular valuation tool favored by many of the world’s top investors such as Warren Buffett.

Put simply, ROIC measures a company’s effectiveness in deploying the debt and equity capital that it has received from investors. ROIC is calculated by dividing a company’s after-tax net operating profit, by the sum of its debt and equity capital.

Stocks with a high ROIC have demonstrated a stronger ability to turn invested capital into profits for shareholders.

This article will discuss 3 of our top high ROIC stocks right now.

Best Buy (BBY)

Best Buy has a ROIC of 35%. Best Buy Co. Inc. is one the largest consumer electronics retailers in North America with operations in the U.S. and Canada. Best Buy sells consumer electronics, personal computers, software, mobile devices, and appliances and provides services. The company’s annual sales exceeded $46.3B in fiscal 2023.

Best Buy reported Q1 FY2024 on May 25th, 2023. Enterprise revenue decreased to $9,467M from $10,647M and non-GAAP diluted EPS decreased to $1.15 from $1.57 on a year-over year basis. GAAP diluted EPS decreased to $1.11 from $1.49. Domestic online sales now comprise about 30.5% of total domestic revenue versus 30.9% last year.

The company is undergoing a restructuring to align its cost structure with current business trends. Best Buy set FY 2024 guidance at revenue of $43.8B to $45.2B and non-GAAP diluted EPS at $5.70 to $6.50.

BBY stock has a 5% dividend yield. With a dividend payout ratio of approximately 60%, the dividend payout appears secure.

HP Inc. (HPQ)

HP is a technology company with a high ROIC of 87%. HP Inc. has centered its business activities around two main segments: its product portfolio of printers, and its range of so-called personal systems, which includes computers and mobile devices. HP reported its second quarter (fiscal 2023) results on May 30. The company reported revenue of $12.9 billion for the quarter.

Unlike during previous quarters, HP did not benefit from a demand recovery for tech equipment from consumers and corporations any longer, and an economic slowdown hurt consumer sentiment and thus spending. Non-GAAP earnings-per-share totaled $0.80 during the second quarter, which was above the analyst consensus estimate.

HP Inc. was able to grow its operating margin slightly over the last year, which helped offset some revenue decline headwinds. The company currently forecasts earnings-per-share in a range of $0.81 to $0.91 for the third quarter, which would mean a small improvement versus the most recent quarter at the midpoint of the guidance range. Earnings-per-share hit a new record level in fiscal 2022.

The company’s high ROIC means it generates strong free cash flow, which it utilizes for dividends and share repurchases. Through a rapid pace of share repurchases, HP has a good chance of growing its earnings-per-share meaningfully going forward, showcased by the reduction of more than 30% in its share count between 2016 and 2022. The stock has a 3.4% dividend yield.

Lowe’s Companies (LOW)

Lowe’s has a ROIC of 57%.  Lowe’s is the second-largest home improvement retailer in the US (after Home Depot). Lowe’s operates or services more than 1,700 home improvement and hardware stores in the U.S. Lowe’s reported first quarter 2023 results on May 23rd, 2023.

Total sales for the first quarter came in at $22.3 billion compared to $23.7 billion in the same quarter a year ago. Comparable sales decreased 4.3%. Adjusted net earnings, which excludes the gain associated with the 2022 sale of the Canadian retail business, rose 5% year-over-year to $3.67 per share.

Between 2013 and 2022, Lowe’s grew its earnings-per-share by 19% a year. In the recent 5-year period, LOW was able to compound earnings by 18% per year. Earnings-per-share have been driven by comparable store sales growth, increasing margins, and the company’s share repurchases, which have lowered the share count meaningfully.

Lowe’s high ROIC allows the company to return cash to shareholders. The company repurchased 10.6 million shares in the first quarter for $2.1 billion. Additionally, Lowe’s paid out $633 million in dividends.

Lowe’s is a Dividend King, as the company has raised its dividend annually for 60 years in a row, even during recessions. This extraordinarily strong track record, coupled with the fact that Lowe’s dividend payout ratio is quite low at 31% expected for 2023.

More By This Author:

The Best EV Dividend Stocks For the Battery-Power Car Boom
3 High Dividend REITs For Long-Term Passive Income
3 Alcohol Stocks For Reliable Growth And Dividends