If you asked average investors to name the top 75 highest-valued companies in the market, they would probably be able to rattle off about half of them. Many of these are recognizable consumer-facing companies, making them easy to guess. However, I would wager many investors would forget about Accenture (ACN 1.95%), the 55th largest company in the world with a $165 billion market cap.
This oversight is unfortunate because Accenture is one of the world's best companies. Over the past decade, it has nearly doubled the performance of the S&P 500. Accenture also produced an unheard of 30% or greater return on invested capital (ROIC) every quarter during that period.
Why has Accenture's ROIC made it such a great investment, and will it continue to beat the market?
Accenture's expertise will always be needed
First, let's discuss what Accenture does. It is in the tech consulting business, helping companies devise a strategy, create a solution, and then maintain it after its implementation. With technology becoming increasingly complicated, Accenture's expertise will always be needed to help with artificial intelligence solutions, cloud infrastructure, analytics, and more.
Consulting businesses have always thrived because no one has employees with expertise in every field. But companies can easily outsource work to a company that does. With Accenture's 721,000 employees spread across 120 countries, it has the most resources of any consulting company, making it the go-to firm for many customers.
Accenture's success is illustrated by its fourth-quarter 2022 report. Revenue rose 22% year over year for the quarter (ended Aug. 31) and 26% for the fiscal year in local currencies. However, due to the strength of the U.S. dollar, its revenue growth was much lower when arbitrarily converted to U.S. dollars.
Accenture is a diversified global company (it's based in Ireland, and more than half of its revenue came from outside the U.S. in the fourth quarter), so it doesn't make sense to account for its revenue in dollars, since it isn't actually converting its revenue in its bank account.
The company had earnings per share (EPS) of $10.71 (up 22% year over year) during fiscal year 2022, valuing it at 25 times earnings. It also paid out $2.5 billion in dividends ($3.88 per share, a 1.5% yield) and repurchased $4.1 billion in shares. It's hard to not be excited by these numbers as an investor; the business is thriving and rewarding shareholders.
As for fiscal year 2023, Accenture projects its revenue will grow between 8% and 11% in local currency. In the first quarter, revenue growth is expected to be about 12%, which means Accenture doesn't have a rosy outlook on the economy as 2023 progresses. Still, if it can manage to grow while many other businesses will likely stagnate, this guidance should thrill investors.
While these are great reasons to invest in Accenture, there's one more that tops all the others.
Why ROIC is important
As alluded to above, the company's ROIC has stayed above 30% for every quarter over the past decade. So why is this important?
Return on invested capital measures how efficiently a business uses capital to generate profits. The higher this percentage, the more efficient a business is. Multiple studies have found that high ROIC is better correlated to a stock's returns than its EPS growth, making ROIC one of the best indicators of a stock that could perform well over long periods.
Check out this graph of other tech stocks to see how impressive Accenture's sustained ROIC levels are.
ACN return on invested capital. Data by YCharts.
While Accenture's ROIC has been trending down over the past decade, it has stabilized at the 30% mark. Still, none of these other companies (among the best in the world) have even come close to sustainably achieving what Accenture has.
At 25 times earnings, more growth on the horizon, a solid 1.5% dividend, and a proven management team that has consistently generated strong returns on capital, it's hard to find a bear case against Accenture. While you could argue that its business would be harmed in a recession (I'd agree with that sentiment), over the long term, the company should do just fine.
I think Accenture is primed to beat the market for the foreseeable future, and investors should take advantage of the stock's weakness (down 16% this month) to buy some shares.
