If you want to find sectors that soon suffer in an economic downturn, then you would be hard pushed to select two better candidates than recruitment and advertising. When global players in these leagues produce excellent figures, you can take it that the world is still spinning.
WPP (WPP), the world’s largest advertising agency, and white collar recruitment group Hays (HAS) have both seen revenue and profits leap across the globe. Crucially, they have both triumphed in the face of a strong pound, which reduces overseas profits in sterling terms. Strong companies take the rough with the smooth and get on with the job.
WPP reckoned it has been “ravaged” by the strong pound. Even so, revenue was up 2.7% and profits were up 15% after allowing for an 8.6% negative impact from sterling. That is the sort of ravaging that many companies would love to suffer.
Significantly, revenue from the UK was up more than in any other territory and there were also great performances in North America and Asia Pacific, which contain the world’s two largest economies.
Chief executive Sir Martin Sorrell is a highly perceptive man with a finger on many pulses so investors should always read what he says and take note. His reference to the “continuing fragility” of the Eurozone is no surprise but he also confirmed a slowdown in emerging markets and suggested that wars in the Middle East and Eastern Europe are affecting business decisions. Back home, uncertainty over Scottish independence and Britain’s EU membership are a drag.
While there are no big surprises there, Sorrell’s comments are a warning that investors cannot put their heads in the sand and hope it will all go away. Clients, he says, are more confident than in September 2008 but they are still reluctant to take risks.
One interesting side line is that WPP does not hedge against currency changes, preferring to “grin and bear it for a year until we come out of the cycle”. Sorrell rightly describes such hedging as taking risks, not the elimination of risk as some chief executives would have you believe.
Hays bumped up profits by 12%, a growth rate that chief executive Alistair Cox said he would have “bitten your hand off for” a year ago. Furthermore, he said that quarterly growth accelerated during the past 12 months. As with WPP, key markets in the UK, Asia and North America provided the main boost although Hay actually managed to do well in some European markets, which demonstrates the merits of getting on with the job rather than sitting back and wringing your hands.
Cox is taking the opportunity to eliminate net debt and build a cash buffer, a very sensible notion ahead of the coming rise in interest rates, but has still found scope for an immediate rise in the dividend.
Neither company looks overpriced at the moment and both have been higher earlier this year. Yields are reasonable though not compelling at just over 2% but both dividends are well covered. Hays and WPP rate at least a hold.
Tesco’s Prospects Turn Sour
I’ve banged on about supermarkets, particularly Tesco (TSCO), often enough so I’ll keep this short and concentrate on the wider lesson for investors. The travails at Tesco have been well documented and earlier this week rumours circulated that the dividend would be ‘rebased’ - which is just a euphemism for slashed.
Companies do sometimes produce shock warnings but mostly the signs are there to be seen. There are many opportunities to cut your losses – or even to take a reduced profit – but all investors, especially long term ones like myself, are tempted to stay in and hope it will all come right. You do so at your peril.
