Invest in These Great Places to Work
These companies do well by their workers, which can translate into gains for investors.
Love your job? Lucky you. Being employed at a great place to work is a career plus. And if you’re an investor, there’s also good news tied to job satisfaction: Companies that treat their workers well are increasingly being viewed as good investments.
Of course, it’s vital for companies to increase their sales and profits to attract investors. But in a time when fair treatment of workers, racial equality and health safety protocols dominate the national discussion, a company’s people skills can rival its price-earnings ratio when evaluating a stock’s potential.
Investor attention to the workplace is more than a passing fad. Job perks that are good for workers—think competitive wages and benefits, a healthy work-life balance, ample family and sick leave, and a workplace culture committed to diversity and equal pay—also tend to boost a company’s bottom line. “Investing in your employees is going to pay off in the long haul,” says Jade Huang, a portfolio manager at Calvert Research and Management.
Higher returns. Quantifying the positive intangibles associated with human capital isn’t an exact science. But studies show a positive correlation between happy workers and strong stock performance. A 2015 study from Glassdoor, an employment website that compiles anonymous worker reviews, found that a portfolio of companies named to its “Best Places to Work” list returned 22.8% annualized from the start of 2009 through 2014, compared with 14.1% for the S&P 500 index. “The results,” the study concluded, “suggest an important economic link between company intangibles, such as employee satisfaction, and broader financial performance.”
Similarly, Bank of America research published in 2019 found that “Happy workers equal alpha.” (Alpha is Wall Street’s code word for benchmark-beating performance.)
Jerome Dodson, founder of mutual fund firm Parnassus Investments, has long believed in the merits of investing in companies that do well by their employees. In 2005, the firm launched a workplace-focused fund, Parnassus Endeavor (symbol PARWX). Decades ago, Dodson’s focus on workers was a rarity. “I would go around to companies and ask questions [about] how they treat their employees,” Dodson says. “Sometimes they would be taken aback, and ask, ‘Why are you asking those questions? You’re supposed to ask about the income statement and the balance sheet.’ ” Dodson stepped down from managing the fund at the end of 2020; the fund returned nearly 13% annualized over his tenure, compared with 10.0% for the S&P 500.
Today, an entire industry has been built around ESG investing, which views investment decisions through the lens of a company’s record on environmental, social and governance issues. Workplace matters are a big part of the social component of ESG. During the pandemic, many companies garnered attention depending on whether they stepped up to help employees and local communities navigate the crisis—or didn’t. Credit card processor Mastercard pledged no layoffs in 2020, for instance, and Home Depot boosted the amount of paid time off for its associates, paid weekly bonuses, and extended dependent care benefits.
Given the sharpened focus on the social aspects of corporate culture, and on workplaces in particular, we looked for companies that are not only great places to work, but also great investments. The five companies below made our list. (Stock prices, returns and other data are as of December 4. Sources are Morningstar Inc., Refinitiv, S&P Dow Jones Indices and Yahoo Finance. Price-to-earnings ratios are based on estimated earnings for the next 12 months.)
- Symbol: HD
- Price: $264
- Industry: Home improvement
- Market value: $284.2 billion
- P/E Ratio: 22 (based on estimated earnings for the next 12 months)
- 1-year return: 26.3%
Employees at the leading home-improvement chain were deemed essential workers during the pandemic, a delineation that meant the retailer’s 413,000 store associates had to report to work instead of working remotely or sheltering in place. In good and bad times, homeowners and businesses rely on Home Depot for urgent needs including appliances, air conditioners and parts for electrical and plumbing repairs, as well as key storm-related items such as sump pumps and plywood. But executives took steps to protect workers during the pandemic, says Derek Deutsch, a managing director and portfolio manager at ClearBridge Investments. “They were really proactive instituting important safety measures,” he says.
Home Depot was one of 100 businesses recognized as “America’s Most Just Companies,” a list compiled in October by Just Capital, a nonprofit that ranks corporations on their interactions with workers, communities, customers and the environment, as well as with shareholders. And the retailer was one of just 39 stocks in RBC Capital Market’s “ESG Best Ideas” list published last June. For the most recent quarter, the firm not only reported a 23% jump in sales compared with a year ago, but also said it was boosting its investment in its frontline hourly associates with permanent pay increases totaling $1 billion annually.
And the investment thesis for Home Depot shares remains sound. Americans are spending less on meals out, travel and entertainment—but more on home improvements, such as expanding interior square footage and adding outdoor kitchens and fire pits. Record-low mortgage rates and a strong housing market are also boosting demand for products such as lumber, lighting and landscaping supplies. In a sector that is essentially a duopoly of Home Depot and Lowe’s, “Home Depot is the leader,” says Deutsch. Analysts expect Home Depot to increase revenues by nearly 18% and earnings per share by 15% for the fiscal year ending in February 2021, according to earnings tracker Refinitiv. The stock sports a hefty dividend yield of 2.1%. (Home Depot is a member of the Kiplinger Dividend 15, the list of our favorite dividend stocks.)
- Symbol: MA
- Price: $344
- Industry: Credit services
- Market value: $343.3 billion
- P/E Ratio: 41
- 1-year return: 20.7%
Credit card payment processor Mastercard is on the right side of the global move away from paper money to digital payments. It is also on the side of its nearly 19,000 employees. Among companies in the S&P Global 1200 stock index, Mastercard ranks in the top 20 in terms of human capital management, according to Sustainalytics, an ESG ratings firm. Mastercard, which last year expanded its parental leave benefit to 16 weeks, also scores highly when viewed through a diversity lens, with four women on the board. “The company has very strong policies around diversity and inclusion,” Huang says.
Mastercard’s brand positioning is strong. So are the financials underlying its business, despite headwinds from the pandemic. Sales fell 14% in the third quarter, due largely to fewer transactions outside the U.S. caused by COVID-19 travel restrictions. But U.S. business is bouncing back, and as hopes for a speedy rollout of a COVID-19 vaccine are growing, so too are hopes for a revenue rebound at Mastercard. Analysts estimate sales will increase nearly 19% in 2021 as consumer spending normalizes.
Mastercard, which along with Visa dominates the global payments business, is poised to profit from growth in e-commerce and digital payments, which has accelerated during the pandemic. Even in brick-and-mortar retail stores, fewer customers are paying with cash. Mastercard saw contactless payments rise to 41% of in-person transactions during the third quarter, up from 30% in the same period in 2019. Globally, seven of 10 consumers said “the shift to digital payments will likely be permanent,” according to a recent Mastercard survey. A pullback in the shares from a recent peak of $366 in late August is a “buying opportunity,” says analyst Bryan Keane at Deutsche Bank.
- Symbol: CRM
- Price: $226
- Industry: Software applications
- Market value: $206.7 billion
- P/E Ratio: 60
- 1-year return: 44.4%
That Salesforce has a “chief equality officer” and a “chief people officer” speaks volumes about its commitment to its 49,000 employees. The company is a leader in customer relationship management software, which helps its customers’ marketing, sales, e-commerce and IT teams work together virtually. Salesforce also ranks fourth on the 2020 “World’s Best Workplaces” list, published by corporate consultant Great Place to Work. Some 93% of Salesforce employees ranked the firm favorably. Just Capital ranks Salesforce tops in the software industry for its treatment of workers and its commitment to workplace diversity, equity and inclusion.
The focus on people comes straight from CEO Marc Benioff, a longtime advocate of ESG principles. Salesforce is also being recognized for its commitment to mental health issues, which have spiked during the pandemic, says Katherine Collins, manager of the Putnam Sustainable Leaders Fund. During the COVID-19 crisis, Salesforce launched Work.com to help businesses with such workplace-safety tasks as coronavirus contact tracing, employee wellness assessments and shift management.
For investors, Salesforce is a growth juggernaut. For eight straight years, tech consulting firm Gartner has ranked Salesforce first in the large and fast-growing customer relationship management market, in terms of market share measured by revenues. In 2019, Gartner says Salesforce gained more market share than the next nine competitors combined, claiming a 20.1% share of a nearly $57 billion market. By 2024, Salesforce will expand its share to 35%, CFRA projects. And the size of the pie Salesforce is competing for keeps growing. Analysts forecast Salesforce revenues overall, including sales in other business lines, to grow more than 23%, to $21.1 billion, for the fiscal year ending in January 2021, and 20% in fiscal year 2022, according Refinitiv.
Last August, keepers of the Dow Jones industrial average added Salesforce to the blue-chip stock index. The stock isn’t cheap, making Salesforce a buy-on-the-dip-type purchase for long-term investors. Its P/E is 60 based on earnings estimates for the year ahead. That’s rich compared with the S&P 500, recently trading at 23 times earnings. Still, the valuation is “reasonable” for investors buying a stake in “one of the most disruptive innovators,” says CFRA analyst John Freeman.
- Symbol: SBUX
- Price: $102
- Industry: Restaurants
- Market value: $120.0 billion
- P/E Ratio: 35
- 1-year return: 22.2%
Starbucks employees are in many ways the hosts of the nation’s away-from-home living room. The importance of treating its public-facing workers well is not lost on the giant coffee chain’s leader. “Caring for Starbucks [employees] is at the core of our company,” president and CEO Kevin Johnson said last March, when the impact of COVID-19 began to sink in. The company recently announced a round of pay hikes taking effect in December. Since the pandemic, Starbucks has rolled out a program that gives all U.S. employees access to 20 free sessions a year with a mental health therapist. It has established a $10 million relief fund that offers one-time grants to employees facing financial hardships and temporarily expanded catastrophe pay.
In 2019, Starbucks conducted a civil rights assessment to guide its progress on building a more inclusive work culture, achieving 100% gender pay equality and supporting other social issues. Starbucks also offers both full- and part-time workers a broad list of benefits, including paid college tuition for eligible associates. Such perks are a big reason why Just Capital ranks Starbucks first for workers in the restaurant and leisure industry.
For investors, Starbucks delivers the jolt of a top global brand with a track record of steady growth. But the company has not been immune to COVID: For the fiscal year that ended in September, Starbucks reported a 14% drop in comparable-store sales globally, driven by a 22% decrease in transactions but partially offset by a 10% increase in the average ticket. But fiscal 2021 is shaping up to be a better year for the cup-of-joe chain. Analysts expect the company’s earnings to more than double, to $2.81 per share, in fiscal 2021 compared with the previous year. Sales are expected to increase 21%, to $28.5 billion, over the same period. CFRA analyst Tuna Amobi’s “buy” rating reflects a “faster-than-expected recovery” in lead growth markets, including the U.S. and China, and a reopening of most of the chain’s global restaurants. Income investors will appreciate the stock’s 1.8% dividend yield, which is significantly higher than the 0.97% yield on a 10-year Treasury note.
- Symbol: TGT
- Price: $175
- Industry: Discount stores
- Market value: $87.7 billion
- P/E Ratio: 20
- 1-year return: 43.4%
Target is another essential business that stayed open to keep customers stocked with everyday staples such as food, prescriptions and cleaning products, even as COVID-19 shut down broad swaths of the economy. Target thanked its 350,000 front-line workers by twice doling out bonuses of $200 during the pandemic. It also followed through on a move outlined in 2017 to boost the pay of new hires to $15 an hour. Those types of employee-friendly gestures are reasons why 89% of employees at Target say it’s a great place to work, compared with 59% of employees at a typical U.S. company, according to a 2019 Great Place to Work survey.
Andy Braun, portfolio manager at Pax Large Cap Fund, says Target is also executing well from a business standpoint. Refurbished stores, an aggressive push into e-commerce, and more-convenient fulfillment options, such as online ordering with at-store pickup, have enabled Target to better compete with online giant Amazon.com and sustain growth, he says.
Target’s digital sales skyrocketed 155% in its third quarter (ending October 31), and earnings more than doubled compared with the same period a year ago. When results are posted for the fiscal year ending January 31, analysts expect a 42% jump in earnings per share; sales should tack on 18%, according to Refinitiv. “Target is among the most visible long-term beneficiaries of COVID-19,” says Morgan Stanley analyst Simeon Gutman.