Stocks with high returns on invested capital (ROIC) and a history of annual dividend increases are one of the best combinations for investors looking to beat the market. ROIC represents a company's profitability compared to its total debt and equity -- the higher the figure, the better. This metric is crucial to investors as businesses with higher ROICs tend to outperform their peers over time.
These high-ROIC stocks can then return the excess income they generate to shareholders through growing dividends and share repurchasing programs. These growing dividends have proven to be a market-beating proposition as stocks with increasing payouts have outpaced the broader S&P 500 index by 2.5% annually since 1973.
With their high ROICs and ability to raising their dividends into the future, Murphy USA (NYSE: MUSA) and Winmark (NASDAQ: WINA) are two stocks that buy-and-hold investors would be wise to consider today. Let's explore each company's operations and see what makes them so attractive now.
1. Murphy USA
Spun off from Murphy Oil in 2013, convenience store chain Murphy USA has posted a stellar total return of more than 500% as a public company, easily outpacing the S&P 500 index.
Adding over 500 stores over this time, Murphy has grown its total count to over 1,700 locations. This vast network of convenience stores throughout the Midwest and Southeast portions of the U.S. helps give it a low-cost advantage on fuel prices due to the economies of scale it receives.
With many of its smaller kiosk-sized locations adjacent to a Walmart, thanks to a now-defunct partnership, perhaps it should be no surprise that Murphy's core focus is on everyday low prices. This cost-conscious emphasis on fuel prices amid rising inflation has catalyzed Murphy as it quickly grew its active loyalty membership count to 3.8 million.
The Murphy Driver Rewards program and the company's leadership positioning in fuel prices give it a massive advantage over single-store operators that cannot match Murphy's economies of scale. With these single-store operators still making up over 60% of the U.S. convenience store market, Murphy USA is well-positioned to add 40 to 50 stores annually while considering further mergers and acquisitions.
Growing earnings per share (EPS) by 700% over the last decade, Murphy recorded an average ROIC of 17% over the same time -- carving out a profitable niche among the famously razor-thin margins of the convenience store industry.
MUSA Return on Invested Capital data by YCharts.
With its outsized profitability, the company has been able to carry out a massive share buyback program that has lowered its share count by 54% in the last decade. Additionally, Murphy began paying a rising quarterly dividend in 2020 that now yields 0.5% but only uses 5% of the company's net income. This leaves a tremendous runway for future increases and highlights how well-funded its dividend payments are.
With an enterprise value-to-earnings ratio (similar to price-to-earnings ratio, but includes a company's debt) of 11.6, Murphy USA remains attractively priced -- well below its average of 14.6 on this metric over the last 10 years.
These incredible shareholder returns, paired with its cost advantage and efficient scale moats, make it a strong under-the-radar candidate to continue beating the market for decades as it continues to take share from single-store operators.
2. Winmark
With Statista projecting the "circular economy" to more than double its sales from 2022 to 2026, Winmark and its resale franchises look well-positioned to thrive. Consisting of secondhand, refurbished, shared, and rented goods, the circular economy has risen to prominence of late -- particularly among Gen-Z (26 years old and younger) shoppers.
In fact, roughly half of the sustainability-focused generation already participates in the circular economy in some form. And it is this backdrop that makes an investment in Winmark interesting today.
Consisting of five resale franchises: Plato's Closet, Once Upon a Child, Play it Again Sports, Style Encore, and Music Go Round, the company and its mission is to provide resale for everyone. Whether it's clothes, toys, instruments, or sports gear, Winmark offers affordable price points for customers by exchanging and reselling many lightly used items.
While these operations may not seem breathtaking to investors, the company has more than doubled and tripled its revenue per share and EPS, respectively, over the past decade. Even more impressively, its ROIC has soared, helped by dividends and share buybacks.
WINA Return on Invested Capital data by YCharts.
This stellar ROIC is possible thanks to the company's asset-light franchise model and incredible 48% net income margin. Armed with this immense profitability, Winmark has lowered its shares outstanding by 31% over the last decade -- all while paying out quarterly and special dividends on its way to delivering total returns north of 500%.
Maintaining renewal rates of 99% across the last three years with its franchisees (including the pandemic period), Winmark shows no signs of slowing down as the trend toward a circular economy continues to gain momentum. Following a 50% spike in price, the shares trade at 30 times earnings -- a premium valuation -- but this stock should be on any dollar-cost averaging investor's radar for the long haul.
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Josh Kohn-Lindquist has positions in Murphy Usa and Winmark. The Motley Fool has positions in and recommends Walmart and Winmark. The Motley Fool has a disclosure policy.
