Top-3 High-Return Stocks That Pay Dividends to Investors

Return on invested capital, commonly known as ROIC, is the ratio of the after-tax operating profit of a company to the sum of its cost of debt and equity capital. ROIC is useful when compared to the weighted average cost of capital (WACC) of the company.

The wider the difference between ROIC and WACC, the more efficient the company is in its allocation of capital.

As high-ROIC stocks allocate the capital of their shareholders in a highly-profitable way, they are among the highest-quality stocks in the investing universe. 

In this article, we will discuss the prospects of three high-ROIC stocks that also pay dividends.

1. Automatic Data Processing (ADP)

Automatic Data Processing ADP is one of the largest business services outsourcing companies in the world. The company provides payroll services, human resources technology and other business operations to more than 700,000 corporate customers.

ADP posted first quarter earnings on October 30, 2024, and results were better than expected on both the top and bottom lines. Adjusted earnings-per-share came to $2.33, which was 12 cents ahead of estimates.

Earnings were up from $2.08 in the year-ago period. Revenue was up 6.7% year over year to $4.8 billion, beating expectations by $30 million.

Management noted revenue and margin performance exceeded expectations as the company benefited from new business bookings, strong revenue retention and higher client funds interest revenue.

Employer services revenue was $3.26 billion, up 7% year over year, while segment earnings grew 15% to $1.16 billion. That was good enough from pretax margin to rise from 33.1% of revenue to 35.7%.

Automatic data processing has compounded its adjusted earnings per share at a rate of more than 13% per year over the last decade. Looking forward, we believe the company is capable of delivering 9% annualized growth in earnings per share over full economic cycles. 

Much of this growth is likely to be driven by the company’s professional employer organization (PEO) services segment, which continues to deliver very impressive revenue growth. 

Importantly, this revenue growth has been accompanied by meaningful margin expansion, which means that the segment’s growth has had an outsized impact on the firm’s bottom line. 

In addition, the company’s buyback has been a low single-digit tailwind annually for earnings-per-share growth.

2. EOG Resources (EOG)

EOG Resources EOG is a crude oil and natural gas company headquartered in Houston, Texas. It is principally engaged in the exploration, development and production of crude oil and natural gas with reserves in the United States, Canada, Trinidad and China.

EOG has three operating segments split by geographical areas: crude oil, natural gas and natural gas liquids (NGL). Crude oil is the largest segment, which accounts for 79% of revenue.

On November 7, 2024, EOG Resources reported its Q3 2024 results. For the quarter, EOG recorded total revenue of $5.97 billion, a slight decrease from $6.03 billion in the second quarter and down from $6.21 billion in Q3 2023.

Net income for the quarter was $1.67 billion, translating to earnings per share of $2.95, which was consistent with Q2 2024. The company generated a solid operating cash flow of $3.0 billion, a significant increase from $2.28 billion in Q2 2023, and produced $1.5 billion in free cash flow.

Total expenditure for the quarter were $1.57 billion. EOG’s cash and cash equivalents rose to $6.12 billion, and the company sustained a low debt-to-total capitalization ratio of 11.3%.

The earnings-per-share numbers in the above table show the cyclical nature of EOG Resources' industry. Over the last decade, earnings-per-share have ranged from -$8.29 to $13.71. Net income is heavily dependent on oil prices. 

Strong free cash flow growth has helped the company strengthen its balance sheet by reducing its debt and rewarding its shareholders with special dividends. The company has a solid dividend history with a roughly 27% CAGR since 2013. Due to the impressive free cash flow, EOG has rewarded shareholders with special dividends over the past couple of years including a $5.80 special dividend announced in 2022. 

In addition, the company also increased its common dividend to $3.90 per share annually. This is 7% higher than the previous level. The current dividend is covered at a $32 WTI oil price, and we have estimated an 8% dividend growth rate over the next five years.

3. Yum! Brands (YUM)

Yum! Brands YUM owns the KFC, Pizza Hut, Taco Bell and the Habit restaurants chains. It is present in more than 155 countries and has more than 59,000 restaurants, 60% of which are located abroad. KFC generates about half of the total revenue and operating profit of the company.

In early November, Yum! Brands reported results for Q3 2024. It grew its sales only 1% over last year’s quarter, as 5% growth of store count was almost offset by a -5% decline in same-store sales. KFC and Pizza Hut incurred pressure in same-store sales amid tough comparisons.

Digital sales were over $8 billion and exceeded 50% of total sales. Earnings per-share dipped -5%, from $1.44 to $1.37, and missed the analysts’ consensus by $0.04, mostly due to a higher tax rate.

Yum! Brands keeps opening new stores at a fast pace this year and still expects 8% growth of operating income.

Yum! Brands has returned to strong growth mode thanks to the growth of its store count and its same-store sales. The company expects to grow its store count by 4% to 5% per year in the upcoming years. 

Before the spin-off of its Chinese segment, Yum! Brands grew its earnings-per-share at a 7.6% average annual rate. During the last five years, Yum! Brands has grown its earnings-per-share at a 10.3% average annual rate.

The strength of Yum’s brands and their appeal to consumers constitute a significant competitive advantage. Thanks to its established brands, the company enjoys reliable free cash flows.

At the time of publication, Ciura had no positions in any securities mentioned.