Hi there, Fools. I’m back again to highlight three businesses with solid returns on equity (ROE). Why? Because a company that consistently posts a strong ROE usually boasts two important qualities:
- a strong management team that’s able to efficiently manage shareholder capital; and
- a durable competitive advantage that translates into industry-topping returns.
While ROE isn’t perfect by any means (no metric is), it remains a key tool in measuring business quality — and quality is what counts when building long-term retirement wealth.
So, without further ado, let’s get to it.
Leading things off is Alimentation Couche-Tard (TSX:ATD.B), which consistently posts an ROE in the low to mid 20% range. Shares of the convenience store operator are up 28% over the past year versus a gain of 9% for the S&P/TSX Capped Consumer Staples Index.
Alimentation is firing on all cylinders. In its most recent quarter, earnings clocked in at US$473.1 million, up solidly from $432.5 million in the year-ago period. Meanwhile, revenue jumped 21% to $14.7 billion, as same-store sales — a key metric in the retail space — increased 5.1% in Canada, 4.4% in the U.S., and 4.6% in Europe.
The stock isn’t dirt cheap. But given Alimentation’s competitive strength, operating momentum, and beta of just 0.6, a forward P/E of 20 seems pretty reasonable.
Next up, we have Aritzia (TSX:ATZ), which boasts a trailing 12-month ROE of 26%. The women’s fashion retailer is up a solid 41% over the past year versus a loss of 17% for the S&P/TSX Capped Consumer Discretionary Index.
Aritzia is also red hot. In the recent quarter, net income tripled to $15.1 million, as net revenue climbed 18% to $205.4 million. More importantly, same-store sales increased an impressive 11.5%, marking the 16th straight quarter of growth.
Aritzia also posted 40% revenue growth in the U.S., suggesting that its expansion potential down south is just as massive.
“We think we’re just at the tip of the iceberg as far as our recognition in the United States,” said CEO Brian Hill.
Currently, the stock trades at a forward P/E in the low-20s.
Finally, we have CI Financial (TSX:CIX), which consistently posts an ROE in the high 20% to low 30% range. Shares of the asset manager are down 37% over the past year versus a loss of 10% for the S&P/TSX Capped Financial Index.
Increased competition and a decline in assets under management (AUM) have weighed on CI shares in 2018, but recent results might indicate a brighter 2019. In Q3, EPS managed to increase 3% year over year to a record $0.62. Furthermore, free cash flow continues to grow, having reached a record $499 million year to date.
With a forward P/E of 8, dividend yield of 3.8%, and beta of just 0.3, CI’s downside looks somewhat limited at this point.
The bottom line
There you have it, Fools: three high-return businesses worth looking into.
As always, they’re not meant to be formal recommendations. Instead, view them as a starting point for further research. Even high-ROE stocks can perform poorly if you buy them too high, so plenty of due diligence is still required.
Iain Butler and his team of analysts are giving away one of their top TSX stock picks for 2019 for FREE – for a limited time.
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Brian Pacampara owns no position in any of the companies mentioned. Couche Tard is a recommendation of Stock Advisor Canada.