RANJF - Randstad: A 5% Dividend Yield With A 50% Payout Ratio

2023-03-04 11:45:00 ET

Summary

• Randstad, a Dutch company, is one of the largest HR and staffing companies in the world.
• 2022 was pretty good despite seeing the business climate getting weaker toward the end of the year.
• This trend continues into 2023 and this year could perhaps be an opportunity to pick up stock again.
• I'm in no rush, but trading at an FCF yield of almost 10%, Randstad is pretty attractive.

Introduction

Randstad ( RANJF ) ( RANJY ) is a Dutch HR services and staffing provider that has been in business since the Sixties. As a very capital-light company, its free cash flow tends to be directly related to the wellbeing of the economy and the demand for staff. Randstad doesn't just deal with temporary workers but also has a headhunting division where it focuses on connecting jobs with potential employees with an academic background.

The correlation with the wellbeing of the world economy also means the company's share price has been pretty volatile in the past few years. But even in 2020, a very difficult year because of the pandemic, Randstad remained profitable.

Randstad has a primary listing on Euronext Amsterdam where the company is trading with RAND as its ticker symbol . The average daily volume in Amsterdam is approximately 380,000 shares per day, which represents in excess of 20M EUR. I will use the Euro as base currency throughout this article.

It's all about the free cash flow

Although I think Randstad should be judged based on the free cash flow it generates, it's usually a good idea to have a look at the income statement as well as that usually provides the starting point for the cash flow result anyway.

The total revenue increased by almost 12% to 27.6B EUR in 2022 which is a great result as the cost of services (the equivalent to the COGS) increased by just 10.5%. This means the gross profit increased by approximately 850M EUR, which is more than 15% and thus helped with a pretty strong gross margin expansion.

Unfortunately Randstad wasn't immune to inflation and higher costs and its selling expenses increased by more than 20% while the G&A expenses increased by about 15% as well. Fortunately the increase of the gross profit was so substantial it was able to cover this increase in operating expenses and the reported operating profit increased by approximately 10%. While that's a slower growth rate than the revenue growth, it still is a respectable result in these volatile times.

The net finance costs also decreased which resulted in a pre-tax income of 1.13B EUR and a net income of 929M EUR. Of that reported profit, about 921M EUR was attributable to the shareholders of Randstad (and 8M EUR was attributable to non-controlling interests). This resulted in an EPS of 5.04 EUR. An increase of more than 20% compared to the 4.13 EUR per share it posted as a net income in 2021.

Keep in mind the average tax pressure at 17.5% was pretty light due to the change in valuation of deferred tax assets. The normalized tax rate is around 24% and if that rate would have been applied, the tax bill would have come in approximately 73M EUR higher and the underlying EPS would have been roughly 4.64 EUR per share.

Still not bad, but investors should just realize there was a small tax benefit in 2022. But whether you use the reported net income or the underlying net income, it was a good year for Randstad.

The company's cash flow statement uses the operating profit of 1.14B EUR as starting point and after making a bunch of adjustments, the reported operating cash flow was 1.07B EUR. This includes 261M EUR in cash taxes (and I will just use this amount as it comes pretty close to the normalized tax pressure Randstad would experience if it wasn't for the deferred tax assets) but also includes a 213M EUR investment in the working capital position. It does however also exclude 210M EUR in lease payments so on an adjusted basis, the operating cash flow was approximately 1.075B EUR.

The total capex (excluding acquisitions) was 122M EUR which means the underlying free cash flow was approximately 950M EUR, and about 940M EUR after taking the non-controlling interests into account. The total amount of outstanding shares (excluding the preference shares) is approximately 183 million, resulting in a free cash flow of 5.14 EUR per share. That's higher than the reported net income (and the underlying net income) mainly due to the 49M EUR in share based compensation. While that's an expense that has an impact on the net income, it does not affect the cash flow (but could and likely will cause a little bit of dilution further down the road).

Investment thesis

2023 still is a black box. Randstad noticed softening markets at the end of its fourth quarter and the company has warned this trend is continuing into 2023. This very likely indicates Q1 will be pretty soft and perhaps the entire financial year could be flat. That's still fine with me as Randstad is an asset-light company and its strong balance sheet with a net debt of just 270M EUR (excluding lease liabilities) is pretty robust.

Randstad will pay a dividend of 2.85 EUR per share which is 50% of the underlying net income , and thus in line with its dividend policy which calls for a 40-50% payout ratio. There is a standard 15% dividend withholding tax in the Netherlands. The stock will trade ex-dividend from March 30 on. Additionally, Randstad will kick off a 400M EUR share buyback program and this should reduce the share count by approximately 4%. A lower share price will allow Randstad to repurchase more shares.

Randstad's financial performance fluctuates along with the world economy. And difficult times have proven to be an excellent opportunity to pick up stock (the share price quadrupled in the year after the Global Financial Crisis and it doubled in the 12 months subsequent to March 2020 when the COVID-19 crisis erupted).

I don't think there's any urgency to pick up stock but I will for sure keep an eye on Randstad's performance on the markets and perhaps posting a weak Q1 result will provide an even better entry point. I'm also considering writing (out of the money) put options but I haven't made up my mind just yet. I see a P50 for May and September have option premiums of 1.30 EUR and 2.30 EUR respectively so perhaps that would be an option. But I am in no rush.

For further details see: