Invest Like Apple: These Tech Firms Have Amazing Returns on Equity

By Chris Marasco - October 18, 2012 | Tickers: AAPL, GOOG, INTC, MSFT, NOK | 0 Comments

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I recall reading a piece of market advice that recommended buying stocks with high returns on equity – high defined as having a return on equity above 20%.  The article claimed that they have a tendency to outperform the market. 

So, I chose one sector – technology – and picked a handful of companies that had returns on equity around or above 20%.  Next, I compared these companies to the price performance of the S&P 500. 

First, this study is limited.  It is worth noting that technology sector has returned 17.68% YTD through October 15, versus 14.51% for the S&P 500 (These numbers do not include dividend payouts.)  This means that the ROE data below could be hampered because the entire tech sector outperformed the S&P 500, and I did not include low-ROE stocks in the research.  For example, perhaps all tech stocks outperformed the S&P, regardless of ROE. 

Also, it is worth mentioning that I did not research the price performance of low-ROE stocks, nor did I look up returns of companies that have increased their ROEs.  This means that the data below does show the effects of a company continually increasing their ROE over time.  The ROE information below is pulled from last quarter’s filings.

Apple

Apple (NASDAQ: AAPL) has massacred the performance of the S&P 500.  Apple’s returns have come from the company’s ability to generate innovative products and turn them into broad, consumer industries.  For example, Apple created the iTunes – an innovation of the MP3 Player.  As a result, Apple created pockets of ecosystems around its product, like iTunes, where it sells music, and products like iPod sleeves, carriers, and chargers.

Apple’s innovation has given shareholders a major windfall – the company has seen only one price direction: up.  Apple’s ROE is based on the company’s ability to generate new innovations.  If the company continues its trend, its returns will likely stay the same. However, if it fails to continue reinventing new industries, Apple will have a hard time maintaining its larger-than-life ROE as its products transfer from growth stories to cash cows.

Google

Contributing to Google’s (NASDAQ: GOOG) high ROE is the company’s 25.74% profit margin last quarter.  Google invests its dollars in businesses that produce high returns, and the company is constantly acquiring new businesses to gain entrance into hot, new industries.  Think YouTube, for example.  For a dated, but high-quality picture graphic of Google’s acquisitions, visit here.

Detracting from Google’s ROE is the company’s tremendous amount of cash on its books.  Google held $41.7 billion in cash as of June 30, 2012, the equivalent of $127.58 per share.

Intel

Despite trading above $29 during the past 52 weeks, Intel’s (NASDAQ: INTC) share price has shrunk due to intensified competition among electronic devices.  The chip maker has suffered recently because consumers have turned away from traditional personal computers in favor of products like tablets and mobile phones.

Despite this negative trend, Intel shares have performed remarkably well – and the percent increase does not include dividends.  Intel’s current dividend payout is 4.2%, giving shareholders a nice recurring return on the stock.

Microsoft

Like Intel, Microsoft’s (NASDAQ: MSFT) 121.6% increase was above the return on the S&P 500.  Microsoft’s software products command high margins, and the company earns recurring profits when it produces a new version of its flagship suite of Microsoft Office products.

Also, Microsoft’s current 3.2% dividend beats the current 1.98% yield of the S&P 500 ETF SPY, giving the company another way to distribute returns to shareholders.

Nokia

I added Nokia (NYSE: NOK) to the list as a wildcard.  Nokia’s share price has dropped 67% since its March 2009 low as it faced outdated technology and major overhead.  Nokia could have major upside if the company is able to bring itself back to profitability and a positive ROE.  Nokia has traded as low as $1.63, but the company pays out a .18 dividend, yielding 6.9%. 

That dividend may be unsustainable.  However, if Nokia is able to turn around its operations, and if the company can get profits back into the black, this low price may be a nice entry point for investors hoping to participate in future high dividends and price appreciation.

Keeping a Watch List

After doing this analysis, the results show that in the tech sector, higher ROEs tend to outperform the market.  As aforementioned, however, I did not compare these stocks with low ROE stocks that also outperformed the market.

After combing through this data, I have added Intel and Microsoft to my watch list – mainly because of their returns on equity, coupled with their high dividends.  If the broad markets take a large dip, the firms’ dividends would stay intact, and there would be room for price appreciation.  Thus, right now I am waiting patiently to scoop up high-ROE, high-dividend tech stocks.

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