Employers are hiring and wages rising but investors are no longer buying into this as a halcyon moment for recruiters such as Hays.
A forward price/earnings ratio of just 12 leaves the shares priced at lockdown-levels of pessimism, a far cry from a multiple of 30 this time last year, as the market braces for the hit to economic growth and business confidence from soaring inflation and geopolitical turmoil. Not even a consensus-beating 32 per cent underlying increase in net fee income, a profit measure, over the third quarter could prompt warmer feelings from investors.
The stock is linked to the fortunes of the broader economy and employer sentiment. That served it well as vaccine success stoked hopes of an emergence from the growth-stifling pandemic. But the outlook now seems dimmer and the shares outperformance has switched to an underperformance of the FTSE 250 index since the start of this year.
Hays can point to record fees in March, with continental Europe the strongest performer, as evidence that hiring growth shows no sign of abating despite the war in Ukraine. But expectations this year have been revised down by forecasters in the EU and UK as inflation bites. Revenue visibility is also inherently low; changes in hiring activity are generally only apparent around three to five weeks out.
The wind has been at Hays’ back for the past 12 months, as white- collar staff shortages push up wages. Promoted staff typically receive a 20 per cent wage rise, says Hays, while underlying pay inflation is running at about 5 per cent. Recruiters are natural beneficiaries of rising wages, with Hays taking a percentage of a permanent hire’s first-year salary and a cut of a contract worker’s overall pay. Management is betting on rising wages plus a rise in staff numbers to keep strong fee growth coming.
Rising headcount is a sign of confidence from recruiters, which for Hays translated into a 27 per cent increase in staff numbers since this time last year. That hiring should drive a 5-10 per cent increase in net fees next year, as less experienced hires are brought up to par.
Hays is still more highly valued than its UK-listed rivals PageGroup and Robert Walters. Scale should command a higher price and Hays has that over its rivals. But so too does it have a higher bias towards temporary rather than permanent recruitment, which has made it less attractive to investors seeking to play the post-pandemic recovery.
Temporary recruitment, the preferred option for companies in times of economic uncertainty, fell less dramatically in the downturn and has naturally lagged the dramatic bounceback in permanent hiring among bullish employers. But the same could also be true if corporate and worker sentiment weakens and more employers revert back to taking on temporary staff.
There is more immediate succour for investors contemplating whether to hang on to the shares. Recruiters are capital-light businesses, so a recovery in fees translates into strong free cashflow and ebullient shareholder returns.
Hays’ policy is to distribute any cash over £100 million on its balance sheet, which stood at a net £240 million at the end of March. So shareholders can expect a sizeable special dividend this year, with analysts at UBS forecasting a special return of 5.5p. In addition to the ordinary dividend, UBS reckons shareholders could be in line for a total dividend of 8.3p this year, which would equate to a yield of 7 per cent at the current share price.
That, and a cut price valuation, is enough to merit retaining the shares even against more uncertain growth prospects.
Advice Hold
Why Lower valuation reflects a more uncertain outlook but the shares should offer a generous dividend yield
Law Debenture
The FTSE 250 constituent Law Debenture is an odd sort of equity income fund. The investment trust, which is managed by Janus Henderson Investors, doesn’t just shoot for income growth by targeting high dividend payers but invests in stocks that don’t have a hope of making cash returns any time soon, such as the fuel cell specialist Ceres Power, alongside the usual high yielding stocks.
Why? A professional services business, whose activities include providing trustee services to pension schemes and acting as an intermediary between corporate bond issuers and holders, which generates enough repeating revenue to give greater flexibility in the companies the trust invests in.
Cash generated by the professional services business, which accounted for 21 per cent of net asset value (NAV) last year, has funded roughly 36 per cent of dividends over the past ten years.
It is a formula that seems to be doing the trick in delivering both income and capital growth for investors. Last year the trust benefited from a recovery in both, generating a total return of 25 per cent, which beat the 6.8 per cent delivered by the FTSE All-Share Index, the benchmark. Even in 2020 Law Debenture increased its payment by almost 6 per cent.
But the longer-term record is encouraging too. The trust has increased its dividend over the past 12 consecutive years and at least maintained that payment over the last 43. The dividend has grown at a compound annual growth rate of almost 12 per cent over the past five years. Even if this year’s payment was kept flat on the prior year, it would still translate to a dividend yield of 3.6 per cent at the current share price.
But NAV returns have also been robust, outperforming the benchmark on a three, five and
ten-year basis, notching up a return of 188 per cent over the past decade.
The shares, which have increased in price by 52 per cent over the past two years, trade at a 1.9 per cent premium to NAV.
But that looks an undemanding price given the twin dividend and capital returns generated over the longer term.
Advice Buy
Why Good record of outperforming the index
