Questor: uncertain economic outlook creates an opportunity to buy this cyclical mid-cap

The firm benefits from a wide spread of operations: it has exposure to 20 sectors across 33 different countries. It also focuses on temporary positions, which have historically proved less cyclical than permanent roles.

While this could provide a degree of resilience relative to rival companies, its share price is likely to be volatile and closely correlated to the world’s economic prospects over the short run. After all, companies are far less likely to hire staff when they face greater financial uncertainty and more challenging operating conditions.

Encouragingly, Hays has a solid financial position with which to confront a more difficult economic future than previously expected. It had net cash of £237m at the end of 2021, while net finance costs were covered more than 13 times in its latest full year.

Its “asset-light” business model does not require significant ongoing investment. This means it has a long track record of being highly cash generative. As a result, it paid significant dividends in the years before the pandemic.

Between the 2017 and 2019 financial years it paid 25.68p per share to shareholders via a mixture of interim, final and special dividends. Following a pause in dividend payments in 2020 in response to the pandemic, it paid a special dividend of 8.93p per share alongside a 1.22p per share final dividend in respect of the 2021 financial year.

In future, it intends to return all capital above a £100m cash buffer to shareholders in each financial year. Although dividend payments will inevitably be somewhat variable as a result of the cyclical nature of its business, Hays could nevertheless provide a substantial income stream over the long run.

In terms of growth opportunities, the firm continues to invest in less mature markets that offer greater structural growth potential. It is also seeking to increase its market share in sectors that offer attractive long-term prospects and rising employment demand, such as the green economy and life sciences.

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