Value Investor Daily #49

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As an investor, you want a management team that can compound your capital at high rates of return.

Return on Invested Capital (ROIC) is one way to screen for that type of company.

If a company can sustain a high ROIC over time, there’s likely a strong moat coupled with a prudent, shareholder-friendly capital allocator running the business.

In 2011, Microsoft was earning over 50% on its invested capital:

But its stock was trading at just 10x earnings:

Here’s what the total returns on the stock look like since then:

Here’s a simple screen we ran to find some potential companies with high ROIC at a discounted valuation:

• 5-year average ROIC over 24%

• P/E ratio under 24 (vs. S&P 500 at 30 right now)

• Positive net cash position (so you can sleep well at night)

You’re getting above-average capital efficiency with below-average valuation with this screen.

But remember, a screener is always just a starting point.

This screen led to many trusts and holding companies, mostly in oil and gas exploration.

But if we sort by revenue, we get more “operating companies.” Over many years, these companies should be able to grow their businesses organically, with very efficient capital allocation and/or shareholder returns.

The top five all look interesting here:

Let’s look closer at Ameriprise Financial (AMP).

It’s got a history of increasing revenue per share, EPS, FCF, stock repurchases, and dividends.

In the last 12 months, here’s how the company’s operating metrics look:

Revenue: $16.9 billion

Free cash flow: $6 billion

Share buybacks: $2.2 billion

Capital expenditures: $169 million

Dividends paid: $560 million

Return on tangible equity: 68%

So, it’s not compounding the cash flow with heavy reinvestment into CapEx, but it’s aggressively returning cash to shareholders.

And it’s beaten the index return over the last ten years:

So, it looks like a very interesting idea we found in just a couple of minutes with an ROIC-focused screener.

Even though the stock is at all-time highs, there may still be value there.

What do you think? Is it worth a deep dive?

As always, make sure you do your own research before investing.

We encourage you to play with the screener and always be on the lookout for capital-efficient companies at reasonable prices.

Thank you for reading today!

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