Never forget the basics.
Although we are constantly bombarded with confusing gibberish when it comes to investing, we must never forget that companies largely exist for one main reason: to take capital from investors and earn a return on it.
That’s why it makes sense that investors seek companies with enduring competitive advantages that can deliver consistently high returns on capital.
As Berkshire Hathaway CEO Warren Buffett once said, “[T]he best business to own is one that, over a long period of time, can employ large amounts of additional capital at very high rates of return.
With that in mind, here are three Berkshire farms with double-digit returns on invested capital.
With returns on invested capital consistently around 20%, credit rating leader Moody’s tops our list.
Moody’s shares held up incredibly well during the height of the pandemic and have risen nearly 220% over the past five years, suggesting it is a recession-proof company to be worth. worth betting.
Specifically, the company’s entrenched leadership position in credit ratings, which drives outsized capital returns, should continue to limit Moody’s long-term downside.
Additionally, Moody’s generated approximately $2.4 billion in free cash flow over the past twelve months. And in the first three quarters of 2021, the company returned $975 million to shareholders through stock buybacks and dividends.
As of Q3 2021, Berkshire owns more than 24.6 million shares worth just under $8.8 billion. Moody’s has a dividend yield of 0.7%.
Then we have the consumer tech gorilla Apple, which boasts a five-year return on investment of 28%, well ahead of rivals like Nokia (-3%) and Sony (12%).
Even in the cutthroat world of consumer hardware, the iPhone maker has been able to generate outsized returns thanks to its loyal brand and high switching costs (the iOS experience can only be had with products Apple).
And with the company continuing to enter emerging markets like India and Mexico, Apple’s long-term growth trajectory remains healthy.
In the last quarter, Apple’s revenue jumped 29% to $83.4 billion. The company also returned more than $24 billion to shareholders.
The stock currently has a dividend yield of just 0.5%, but with a buyout yield of 3%, Apple is giving away more money to shareholders than you might think.
It’s no wonder Apple is Berkshire’s largest public holding company, owning more than 887 million shares of the tech giant worth around $125.5 billion.
Procter & Gamble (PG)
Rounding out the list is consumer staples giant Procter & Gamble, with a strong five-year average return on invested capital of 13.5%.
Berkshire held 315,400 shares at the end of the third quarter, worth about $44 million at today’s prices. While not a large position by Berkshire standards, something sets P&G apart: the ability to deliver growing cash returns to investors through thick and thin.
The company offers a portfolio of trusted brands such as Bounty paper towels, Crest toothpaste, Gillette razor blades and Tide detergent. These are products that households buy regularly, regardless of the evolution of the economy.
In April, P&G’s board of directors announced a 10% increase in the quarterly payout, marking the company’s 65th consecutive increase in the annual dividend.
P&G stock currently offers a dividend yield of 2.2%.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.