Today’s year-end trading update from Pagegroup (LSE: PAGE) shows that the company is performing well in most of its regions. It recorded a rise in gross profit of 20.3% in the fourth quarter of the year, which takes its increase to 11.7% for the full year. Looking ahead, more upbeat growth could be on offer since the company’s strategy appears to be sound. But will its cyclical nature mean that it fails to become a popular income play?
Pagegroup benefitted significantly from the weak pound in 2016. In the fourth quarter, its gross profit rise at constant currency was 3.8%. Similarly, in the full year its gross profit increased by 3% on a constant currency basis, meaning the vast majority of its gains were from favourable currency translation. Looking ahead, this situation looks set to continue since uncertainty surrounding Brexit could lead to a further depreciation of the pound.
Pagegroup’s performance in the UK has been weak when compared to its other regions. Gross profit slumped by 6.7% in the final quarter of the year, which indicates that the UK economy may already be starting to feel the effects of uncertainty regarding the Brexit negotiations that are set to start in the near future. However, this performance was offset by a 35.7% rise in gross profit in the EMEA region, while Asia Pacific and the Americas recorded rises in gross profit of 24.6% and 20.7% respectively in the fourth quarter.
Pagegroup currently yields 3.4%, which is roughly in line with the yield of the wider index. However, the company has the potential to raise shareholder payouts at a faster pace than many of its index peers. A key reason for that is a forecast earnings growth rate of 10% in the next financial year. This could mean that the business has a dividend coverage ratio of 1.5 while yielding 3.8% in the 2018 financial year.
However, the appeal of Pagegroup as an income stock is somewhat limited by its status as a cyclical play. The recruitment industry is one of the most sensitive sectors to changes in the macroeconomic outlook. Although the company is well diversified in geographic terms, Brexit, a new US president and a slowing China could lead to a wider slowdown in the rate of global GDP growth. This lack of consistency means that while the firm has a generous yield and scope to raise dividends, other stocks are likely to prove better income plays.
One example is life insurer Aviva (LSE: AV). It currently yields 5.4% from a dividend that’s covered 1.9 times by profit. Its position within the life insurance industry has been strengthened by the merger with Friends Life. This should provide it with a more consistent and robust income stream over the medium term, as well as greater synergies. The potential for dividend growth is therefore high, while a relatively stable business model means that it offers relatively low risk when compared to more cyclical stocks such as Pagegroup.
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Peter Stephens owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.