When Warren Buffett is on the hunt for strong companies, one of his go-to metrics is return-on-equity, writes Validea CEO John Reese in his latest article for Nasdaq.
Reese explains how ROE is calculated, its implications and what levels make a stock attractive. He also addresses the importance of dividend yield and how investing guru James O’Shaughnessy viewed it as an “essential metric when evaluating large companies.”
Using his guru-based stock screening models, Reese identifies four high-scoring picks with ROEs above 20% and minimum dividend yields of 3% or above:
- Taiwan Semiconductor (TSM), a manufacturer and seller of integrated circuits and semiconductors, earns high marks based on earnings predictability, favorable debt-equity ratio and management’s use of retained earnings.
- VF Corp. (VF) is engaged in the design, manufacture, marketing and distribution of branded lifestyle apparel and is favored for expanding earnings-per-share as well as a decrease in shares outstanding (which indicates that management has been using excess capital to increase shareholder value).
- Paychex, Inc. (PAYX), a provider of integrated human capital management solutions, scores well based on its earnings predictability, debt-free balance sheet and management’s use of retained earnings.
- Telstra Corp. Ltd. (TLSYY) is a telecommunications and technology company favored for its predictable earnings.