Among the S&P 500, these 20 companies have made the best use of investors' money

By Philip van Doorn

High returns on invested capital can be useful for narrowing down a list of stocks for investment

There is no easy way to select individual stocks. Measures of financial quality can highlight companies that are worth a closer look, but a decision to commit money must also take into consideration both recent developments and a look ahead.

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:

   Company                             Ticker   Avg. ROIC -- 12 quarters  Avg. ROIC -- 8 quarters  Avg. ROIC -- 4 quarters  ROIC -- most recent quarter 
   VeriSign Inc.                        VRSN                    202.91%                 207.66%                 231.78%                     281.81% 
   HP Inc.                              HPQ                      89.06%                  84.77%                  36.01%                      27.01% 
   Moderna Inc.                         MRNA                     55.80%                  80.73%                  39.93%                       6.59% 
   Fortinet Inc.                        FTNT                     55.39%                  62.22%                  81.07%                     110.99% 
   Apple Inc.                           AAPL                     52.26%                  58.15%                  58.28%                      60.91% 
   Philip Morris International Inc.      PM                      51.92%                  49.38%                  38.05%                      34.66% 
   Domino's Pizza Inc.                  DPZ                      48.06%                  47.64%                  48.64%                      53.50% 
   Idexx Laboratories Inc.              IDXX                     47.68%                  47.09%                  46.29%                      49.29% 
   Mastercard Inc. Class A               MA                      44.05%                  47.02%                  48.68%                      51.53% 
   Mettler-Toledo International Inc.    MTD                      42.80%                  45.41%                  46.41%                      46.97% 
   Yum Brands Inc.                      YUM                      39.77%                  41.20%                  36.43%                      39.26% 
   Texas Instruments Inc.               TXN                      39.54%                  38.71%                  33.94%                      28.58% 
   Qualcomm Inc.                        QCOM                     39.15%                  40.68%                  36.97%                      26.63% 
   AutoZone Inc.                        AZO                      38.60%                  42.25%                  43.80%                      41.88% 
   Lam Research Corp.                   LRCX                     38.23%                  39.51%                  37.30%                      31.23% 
   Automatic Data Processing Inc.       ADP                      37.64%                  39.95%                  44.98%                      50.81% 
   Home Depot Inc.                       HD                      37.62%                  37.86%                  36.77%                      34.76% 
   O'Reilly Automotive Inc.             ORLY                     36.93%                  39.95%                  42.23%                      43.59% 
   KLA Corp.                            KLAC                     36.84%                  42.18%                  41.69%                      39.64% 
   Waters Corp.                         WAT                      35.95%                  35.74%                  32.72%                      25.43% 
                                                                                                                                    Source: FactSet 

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) 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) 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:

   Company                             Ticker   2023 total return  3-year return  5-year return  10-year return  Forward P/E 
   VeriSign Inc.                        VRSN                   1%             3%            54%            290%         26.5 
   HP Inc.                              HPQ                    0%            50%            33%            224%          7.5 
   Moderna Inc.                         MRNA                 -56%            13%            N/A             N/A          N/A 
   Fortinet Inc.                        FTNT                  18%           121%           264%           1281%         33.9 
   Apple Inc.                           AAPL                  34%            53%           237%            946%         26.4 
   Philip Morris International Inc.      PM                   -6%            43%            35%             71%         14.1 
   Domino's Pizza Inc.                  DPZ                    3%            -7%            46%            483%         22.8 
   Idexx Laboratories Inc.              IDXX                   6%             0%           108%            729%         39.5 
   Mastercard Inc. Class A               MA                   12%            19%           103%            468%         27.5 
   Mettler-Toledo International Inc.    MTD                  -31%            -6%            89%            297%         23.3 
   Yum Brands Inc.                      YUM                   -5%            25%            51%            204%         20.9 
   Texas Instruments Inc.               TXN                   -9%             6%            83%            381%         21.9 
   Qualcomm Inc.                        QCOM                   2%           -10%            99%            118%         11.8 
   AutoZone Inc.                        AZO                   -2%           104%           232%            466%         16.0 
   Lam Research Corp.                   LRCX                  45%            77%           368%           1210%         20.1 
   Automatic Data Processing Inc.       ADP                    2%            71%            94%            353%         25.5 
   Home Depot Inc.                       HD                   -8%             8%            81%            364%         17.8 
   O'Reilly Automotive Inc.             ORLY                   3%            87%           170%            597%         21.0 
   KLA Corp.                            KLAC                  26%           140%           495%           1051%         20.0 
   Waters Corp.                         WAT                  -27%            12%            42%            146%         19.5 
   S&P 500                              SPX                   12%            28%            74%            193%         19.0 
                                                                                                              Source FactSet 

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10-25-23 1211ET

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