Tech Is the New Macro: Impacting All Three Components of Return on Equity

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This post is part one of a three-part series titled “Tech is the New Macro”. Read part two and part three for the full story.

  • Technology is positive for all three return on equity (ROE) components — profit margins, asset utilization, and leverage.
  • Profit margins have soared over the last two decades, reflecting lower labor costs and the evolution to a more capital-light balance sheet.
  • Asset utilization also improves with technology, as you have higher sales per dollar of assets employed in the business (e.g., plant, equipment, and inventories).
  • Regarding leverage, if you don’t need as many assets to run a business, you have the ability to return excess capital to shareholders via cash dividends, share repurchases, or debt reduction. Thus the payout ratio can rise.
  • Tech platforms and their network effects have resulted in a winner-takes-all market, with “wide digital moats” potentially protecting the over-sized returns of these new global champions.
  • In our view, disruptive innovation will affect all economic sectors, not just information technology. As a result, we believe it is ever more important to favor companies with a demonstrated ability to produce free cash flow and allocate that cash flow wisely between return of capital options and reinvestment/acquisition opportunities.

The information contained in this whitepaper is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The information contained in this whitepaper is accurate as of the date submitted, but is subject to change. Any performance information referenced in this whitepaper represents past performance and is not indicative of future returns. Any projections, targets, or estimates in this whitepaper are forward looking statements and are based on Epoch’s research, analysis, and assumptions made by Epoch. There can be no assurances that such projections, targets, or estimates will occur and the actual results may be materially different. Other events which were not taken into account in formulating such projections, targets, or estimates may occur and may significantly affect the returns or performance of any accounts and/or funds managed by Epoch. To the extent this whitepaper contains information about specific companies or securities including whether they are profitable or not, they are being provided as a means of illustrating our investment thesis. Past references to specific companies or securities are not a complete list of securities selected for clients and not all securities selected for clients in the past year were profitable.

Capex (Capital expenditure): Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment.

DuPont analysis breaks apart ROE to gain a better understanding of where movements in ROE are coming from. Dupont’s equation breaks up ROE into three components: 1) Operating efficiency – as measured by profit margin, 2) Asset use efficiency – as measured by total asset turnover, and 3) Financial leverage – as measured by the equity multiplier.

Smoothing is the use of accounting techniques to level out fluctuations from one period to the next.

Wide digital moat: A sustainable competitive advantage created by the use of technology that a business possesses that makes it difficult for rivals to wear down its market share and profit.

New York Life Investment Management LLC engages the services of Epoch Investment Partners, Inc., an unaffiliated, federally registered investment advisor. MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Epoch Investment Partners, Inc.

Epoch’s investment approach is designed to uncover opportunities that others may miss. In our view, growth of free cash flow, and the intelligent use of that cash flow, represent the best predictor of long-term shareholder return. We look for strong company management with

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