Can Robots Really Boost Investing Returns?

There can be something a little unsettling when a restaurant presents you on your arrival with an electronic tablet instead of a proper printed menu.

From the moment you received your handheld electronic device you can order, track and even watch your food being prepared in the kitchen on a web cam, if you like that sort of thing. All this can be done without any human interaction, whatsoever.

The first thought that could pop into your head (it did mine) could be: “I wonder how long it will be before the waiters that bring food from the kitchen to table are replaced by technology too”.

The answer, if a study by Deloitte proves to be correct, is probably not that far away. The management consultant reckons that automation and robotics could put more than one in three British jobs in jeopardy within the next 20 years.

It would appear that around 30% of the work currently performed by humans could be done by computers and robots. But not everyone could be similarly affected, though. Apparently some industry workers could be more susceptible to the threat of new technology than others. For instance, those working in sales and services could be more easily replaced, as could those in construction and production.

The drive to replace humans with technology is already all too apparent in the banking industry where Automatic Teller Machines (ATMs) and push-button, voice activated call centres have replaced cashiers and telephone operators, respectively.

Some might even suggest that more needs to be done, if the urgency to improve productivity in a slow-growth, structurally dysfunctional global economy persists. To compete effectively, banks might have no option but to shed more workers in favour of even more sophisticated technology.

However, that is unlikely, given that efficiencies in banks are already some of the highest in the market. The Return on Equity at DBS Group (SGX: D05) is 11.4%; at United Overseas Bank (SGX: U11) it is 12%, while at Oversea-Chinese Banking Corporation (SGX: O39) it is 13%.

The same cannot be said of the retail industry where profit per worker can vary from as much as S$11,000 at Shangri-La Asia (SGX: S07) to around S$6,000 at Dairy Farm International (SGX: D01). The difference in productivity could be due to the price of goods and service provided, which in the case of the former is luxuriously high and the latter is competitively low.

Whilst it seems unlikely that a technology push could see robots restocking supermarket shelves any time soon, the wider use of self-service checkouts could help cut wage bills, which in turn could boost profits.

Elsewhere, the use of technology could help bolster productivity at Jardine Cycle & Carriage (SGX: C07), where employees generate some of the lowest profits per person amongst the blue chips.

Interestingly, while Jardine C&C might appear to exhibit comparatively low productivity, it punches above its weight from an investor’s perspective. The conglomerate has generated S$31 of profit for every S$100 of shareholder equity invested in the business.

Singapore Exchange (SGX: S68) is also outstandingly effective on that measure. Its Return on Equity is an exceptional 40%, while shipbuilder Sembcorp Marine (SGX: S51) has delivered S$21 of profit for every S$100 of shareholder equity. It is therefore arguable as to whether simply reducing staff numbers at these businesses would really be that productive.

The arbitrary use of technology can sometimes be used a quick fix to improve low productivity. After all, if productivity is measured by the amount of money generated for every worker employed, then cutting staff numbers could go some way to boost it.

But a hurried replacement of humans by machines could do more harm than good. Consequently it is important to bear in mind that there are other important measures of efficiency that we could look at. These could include the efficient use of capital and the proper use of assets.

The Return on Equity, which is a measure of the amount of profit generated for every shareholder dollar invested in a business, is something that we can use to our advantage. In the main, businesses that can consistently deliver a high Return on Equity can also be some of the best investments over the long term.

After all, the Return on Equity reveals the rate at which investors are earning income on their shares, which is what investing is all about, isn’t it?

This article first appeared in The Independent on Sunday.

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