A 2018 survey of CEO pay in 22 countries around the world including the U.S. found that the average CEO was paid $3.55 million annually.
Here in Canada, where I live, the average CEO was paid a little more than $7 million. In the UK, it was almost a million higher than Canada.
How about the U.S.?
Well, it was the number one country for CEO pay at $14.25 million — or more than four times the global average.
Are U.S. CEOs worth that much — or that much more than CEOs in other countries? Not by a long shot. But that doesn’t stop some professorial types from singing their praises.
“The efforts of America’s highest-earning 1% have been one of the more dynamic elements of the global economy. It’s not popular to say, but one reason their pay has gone up so much is that CEOs really have upped their game relative to many other workers in the U.S. economy,” stated George Mason University Economics professor Tyler Cowen in his recent book Big Business: A Love Letter to an American Anti-Hero.
CEOs might have a more complicated job than they had 20 years ago, but that doesn’t justify pay that is 361 times the average U.S. rank-and-file worker.
Investors need only to consider one fact.
“Since 2008, the 100 companies with the lowest CEO compensation within the S&P 500 index have outperformed the 100 with the highest compensation every year except 2013,” Bloomberg reported in March of this year. “The annualized return from 2008 to 2018 was 17.2 percent compared with 8.4 percent.”
It is clear that investing in companies who are doing a good job cutting the gap between the CEO’s pay and the average employee is key to your portfolio’s future success.
Here are seven stocks to buy in that vein.
Intuitive Surgical (ISRG)
CEO Pay: $5.1 million
Pay Ratio: 32:1
The median worker’s pay at Intuitive Surgical (NASDAQ:ISRG) is $157,491, the 22nd highest amount of compensation in the S&P 500.
It kind of makes sense. Do you really want a bunch of low-paid workers manufacturing the company’s da Vinci surgical robotic systems? One wrong move and your hernia repair becomes a one-way ticket to the morgue.
I’m facetious, but I think you get my meaning. By having well-paid employees, not only are they likely to be happier; they’re probably more productive especially when they realize that the CEO makes just 32 times their pay, about one-tenth the U.S. average.
Intuitive Surgical has come a long way from 1999 when it launched the first da Vinci system. At the end of 2018, it had almost 5,000 systems installed; 64% of them in the U.S. with Europe and Asia its next biggest markets, but with plenty of room to grow.
The global surgical robotics market is expected to grow by almost 14% annually over the next seven years to $17 billion. ISRG currently has a 17% market share. If it grows that market share to 25% by 2025, it translates into an additional $1.4 billion in revenue.
As people age, minimally invasive surgery will become even more critical than it already is. As secular trends go, ISRG is one of the best bets you can make.
American Water Works (AWK)
CEO Pay: $4.4 million
Pay Ratio: 53:1
American Water Works (NYSE:AWK) CEO Susan Story is the only woman on this list so if ESG issues are of interest to you; AWK is an excellent stock to consider.
As for its business, that’s also good.
AWK was recently named one of Barron’s 100 Most Sustainable U.S. Companies. Also, Bloomberg included AWK on its list of 230 companies for the 2019 Bloomberg Gender-Equality Index (GEI), a group selected for their dedication advancing the cause of women.
That’s a big deal when you consider that providing equal pay for U.S. women would add $512 billion to the economy on an annual basis.
Here’s another reason to like the water utility.
AWK stock hasn’t had a single year with a negative total return delivering a 10-year annualized total return of 20.6%, which goes entirely against the theory that utilities are dull and poor performers over the long haul.
Providing water services to more than 14 million people in 46 states, AWK is a stock whose business will never go the way of the Dodo bird.
CEO Pay: $2.0 million
Pay Ratio: 58:1
If you’ve owned Fastenal (NASDAQ:FAST) for the past five years, your patience is finally being rewarded after spending four years rangebound between $40-$50. Up 32% year to date through April 15, FAST stock looks like its gallop to $100 is underway.
Consider that the supplier of industrial and construction supplies grew revenues and operating profits over the past five years by 49% and 40% to $5.0 billion and $1.0 billion respectively. And for that, its stock went sideways.
In the company’s Q1 2019 earnings, Fastenal grew the top and bottom lines by double digits. Revenues were up 12.2% on a like-for-like basis, and net earnings rose 11.9% to $0.68 a share.
Helping move the needle is its industrial vending machine program. In the first quarter, it signed 5,603, bringing the total number to 83,410, an increase of 13.4% over Q1 2018. Sales at those machines grew in the high teens in the first quarter.
And you thought vending machines were a thing of the past.
Fastenal is all about customer service. It’s got the growth to prove it.
CEO Pay: $1.7 million
Pay Ratio: 59:1
Say what you will about Amazon (NASDAQ:AMZN) CEO and founder Jeff Bezos, but you can’t deny his company’s success. A $10,000 investment ten years ago is worth almost $247,000 today.
Bezos might be amoral or immoral in your opinion but his ability to deliver what the world’s craving is astonishing. Everything Amazon does is to please the customer.
In Bezos’ annual letter to shareholders, he mentions the word customer on 49 occasions.
“Much of what we build at AWS is based on listening to customers. It’s critical to ask customers what they want, listen carefully to their answers, and figure out a plan to provide it thoughtfully and quickly (speed matters in business!). No business could thrive without that kind of customer obsession. But it’s also not enough. The biggest needle movers will be things that customers don’t know to ask for,” the CEO wrote.
How many CEOs do you know that think like this? I can count the number on two hands. He might be an a**hole in the minds of many, but he’s a brilliant one, cut from the same cloth as Elon Musk.
CEO Pay: $2.4 million
Pay Ratio: 76:1
The cream always rises to the top.
Garmin (NASDAQ:GRMN) is one of those companies that seems to fly under the radar despite being a reasonably large company. If you own Fitbit (NASDAQ:FIT) stock, however, you’re likely more than a little aware of Garmin.
In the most recent quarter, Garmin delivered boffo earnings. Since announcing Q4 2018 results February 20, GRMN stock is up 24%.
A key highlight from earnings was its guidance for 2019.
Analysts were expecting earnings of $3.52 a share on $3.43 billion in revenue. Garmin CEO Cliff Pemble’s outlook is for $3.70 a share on the bottom line and $3.50 billion on the top line.
“2018 was another remarkable year of revenue and operating income growth driven by strong performance in our aviation, marine, outdoor and fitness segments,” Pemble said in its news release. “Entering 2019, we see many opportunities ahead and believe that we are well positioned to seize these opportunities with a strong lineup of products across all of our segments.”
Hopefully, you’re beginning to see a trend. Companies that keep the pay ratio low tend to deliver strong long-term results.
Simon Property (SPG)
CEO Pay: $4.8 million
Pay Ratio: 88:1
A lot of investors might have a problem owning shopping malls. I certainly wouldn’t. But they’ve got to be good. They can’t be Class C malls with no-name retailers filling the place. That’s a recipe for disaster.
Zacks recently wondered if Simon Property’s (NYSE:SPG) efforts were enough to battle the retail blues. Are we seriously still having that discussion in 2019. Well, it turns out there are a lot of crappy retailers still operating including Sears.
“The deepening of the relationship with existing tenants, and the launch of its online retail platform, weaved with an omni-channel strategy, will likely be accretive to Simon Property’s long-term growth,” wrote Zack’s equity research team April 8.
“In fact, the company is investing billions and actively restructuring its portfolio, aiming at premium acquisitions and transformative redevelopments. The transformational plans include the addition of hotels, restaurants, residences and luxury stores.”
The fact is, very few retail mall owners have the vision of the Simon family. They’ve been doing this a long time. They’re more than capable of rolling with the punches.
Good brick-and-mortar retail isn’t disappearing. Just the crappy kind is. Know the difference.
O’Reilly Automotive (ORLY)
CEO Pay: $2.9 million
Pay Ratio: 141:1
Up 19% year to date through April 15, ORLY’s only had one year of negative returns since 2009. As a result, you’re looking at a 10-year annualized total return of 27.3%, almost double the S&P 500.
In 2018, the retailer of aftermarket auto parts had same-store sales growth of 3.8%, at the top of its estimate for the year, the company’s 26th year with an increase. In 2019, it expects same-store sales growth of 3%-5%. This past year it opened 200 net new stores in 36 states. It plans to open as many as 210 in 2019. It now has 5,219 stores across the U.S.
On the bottom line, O’Reilly increased its EPS by 27% over 2017 to $16.10, the 10th consecutive year with a 15% increase in earnings. In 2019, it expects EPS of at least $17.37. Given its track record, you should expect more than that.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.