Banking

Investors Score On 12 Companies Bucking Wage Inflation

Wages are soaring at a pace not seen since the 1980s. But savvy S&P 500 investors are dodging this out-of-control cost and picking companies that need less manpower.




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It turns out a dozen companies in the S&P 500, including real estate firms like Welltower (WELL) plus energy firms like Valero Energy (VLO) and Pioneer Natural (PXD), rely on the smallest number of employees in the index, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. That protects them from soaring wages.

All these companies needed less than 180 employees to generate $1 billion in revenue. That’s based on employee headcounts disclosed last year and revenue the past 12 months. It’s well below the 419 employees the typical S&P 500 company, which disclosed headcounts, needs per billion dollars in revenue. And consider this: McDonald’s (MCD) needs 9,210 employees for every $1 billion in revenue.

And investors seem to appreciate companies doing more with fewer employees. Shares of these labor-light companies are up an average of nearly 61% this year so far. That triple the S&P 500’s 21.1% gain this year.

“Wages rose even though the labor participation rate declined, undermining the ‘transitory’ inflation argument,” said Jack Ablin, strategist at Cresset Capital Management. “Average hourly earnings for nonsupervisory workers rose 5.5% over the 12 months through September, its biggest increase since 1982.”

S&P 500 Fending Off Rising Wages

Heating up inflation is eating into many firms’ bottom lines. And rising wages are a key part of those escalating costs.

Investors are closely monitoring S&P 500 companies’ net profit margins for the third-quarter reporting season ongoing now, says John Butters, earnings analyst at FactSet. “Given concerns in the market about rising inflation, what is the S&P 500 reporting for a net profit margin in the third quarter?” he said.

So far, companies are managing higher costs well. The S&P 500’s net profit margin in the third quarter is coming in at 12.3%, Butters says. That’s actually higher than the 10.9% average in the past five years. It’s also the third-highest net profit margin since at least 2008.

Doing More With Less In The S&P 500

Real-estate companies continue to set the pace at driving revenue with just a handful of employees. And that’s a bonus at a time of soaring wages.

Take Welltower for instance. The Ohio-based company funds the real estate needed in senior housing. It leaves the labor-intensive job of caring for seniors to its operators. It focuses on the land and building requirements.

And the results are powerful. Welltower drove more than $4.3 billion in revenue the past 12 months with just over 400 employees. That means just 97 employees are responsible for driving $1 billion in revenue. And that translates into more than $10 million in revenue per employee.

Investors have taken notice. The stock is up nearly 30% this year. And don’t forget it also yields 2.9% — double the S&P 500’s yield.

S&P 500 Energy: Few Hands, Huge Revenue

S&P 500 energy firms are benefitting from relatively low headcounts — on top of soaring energy prices this year.

Due to its structure, with just 9,964 employees, Valero can drive north of $9.4 billion in revenue. That works out to just 110 employees to power $1 billion in revenue. Shares are up more than 45% this year. And it sports a Composite Rating of 90 — thanks to solid fundamentals to go with its strong stock price.

Similarly, Pioneer Natural drives roughly $6 billion in revenue from just 1,853 employees. That means it only takes 165 employees to put up a billion to the top line. And take a look at Diamondback Energy, which only needs 177 workers for every $1 billion in revenue. It sports a perfect 99 IBD Composite Rating.

So, while many S&P 500 companies talk about wage inflation, some companies can at least somewhat duck this hit.

Fewer Hands On Deck

These S&P 500 companies drive the most revenue from the least number of employees

Company Ticker Stock YTD % ch. Revenue /employee Sector Employees to get $1 billion revenue Composite Rating
Welltower (WELL) 28.7% $10,288,284 Real Estate 97 46
Host Hotels & Resorts (HST) 14.5% $9,435,583 Real Estate 106 57
Valero Energy (VLO) 45.1% $9,020,574 Energy 111 90
Realty Income (O) 14.5% $8,276,239 Real Estate 121 65
Ventas (VTR) 14.6% $8,237,801 Real Estate 121 41
Healthpeak Properties (PEAK) 15.1% $8,233,991 Real Estate 121 62
Everest Re Group (RE) 19.5% $6,366,063 Financials 157 86
Pioneer Natural Resources (PXD) 65.6% $6,048,570 Energy 165 96
Phillips 66 (PSX) 18.3% $5,666,923 Energy 176 72
Devon Energy (DVN) 151.0% $5,642,857 Energy 177 95
Diamondback Energy (FANG) 124.9% $5,637,978 Energy 177 99
Moderna (MRNA) 225.0% $5,399,535 Health Care 185 69
Sources: IBD, S&P Global Market Intelligence, employee count 2020, revenue in past 12 months
Follow Matt Krantz on Twitter @mattkrantz

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