ii view: Compass dividend up 60% plus new share buyback

This defensive food play bucked the trend in 2022, rising 16%, and has risen further in 2023. Buy, sell or hold? 

First-half results to 31 March

• Adjusted revenue up 24.7% to £15.8 billion
• Adjusted operating profit up 41% to £1.05 billion
• Interim dividend up 59.6% to 15p per share
• A new £750 million share buyback programme
• Net debt up 7% from late September to £3.2 billion

ii round-up:

Global catering giant Compass Group (LSE:CPG) today raised its full-year estimates as both half-year revenues and earnings beat City forecasts. 

Adjusted sales growth of almost a quarter lifted underlying operating profit to more than £1 billion, underpinning a new £750 million share buyback programme and a near 60% hike in the interim dividend payment to 15p per share. 

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Shares in the FTSE 100 company rose by more than 2% in UK trading having come into this latest announcement up by close to 8% year-to-date. That’s similar to rival Sodexo (EURONEXT:SW), while the FTSE 100 index itself has gained by around 2.5% over that time. 

Compass normally serves around 5.5 billion meals per year to staff of around 55,000 global clients across more than 40 countries although was forced to close many of its canteen operations during the pandemic. 

Full-year revenue, stripping out acquisitions, is now expected to grow by around 18% from a previous 15% estimate, helping operating profit up by a potential 30% year-over-year from a prior 20% growth forecast. 

Management summarised growth as balanced across all regions, although particularly strong in Europe. Existing client retention remained robust at 96.7%, while net new business sales came in at 5.2% of revenues.

Strong trends for clients outsourcing operations for the first-time continued, with such clients accounting for almost half of new net business wins during the period. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the results, flagging an estimated fair value price of £22 per share.  

ii view:

Separated out of the former media company Granada in 2001, Compass Group today employs around half a million people. It operates across the five areas of Business and Industry, Education, Healthcare and Senior Living, Sports and Leisure, and Defence, Offshore and Remote. 

Geographically, North America generates its biggest proportion of sales at around two-thirds, followed by Europe at just over a fifth and the rest of the world the balance. Group clients include the likes of Shell (LSE:SHEL), Microsoft (NASDAQ:MSFT), Nike (NYSE:NKE), and HSBC (LSE:HSBA). 

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For investors, the tougher economic backdrop, including high interest rates and a cost-of-living crisis for consumers, is now pressuring many of the firm's clients. Costs such as food, a major group expense, remain elevated, pressure for staff wage rises persists across industry, while currency movements can have a big impact given a high proportion of overseas sales. 

On the upside, a desire by companies to cut costs appears to persist, with client retention strong and new business wins being made. Compass has previously highlighted global structural growth opportunities, with just under half the worldwide food services market still self-operated, while shareholder returns remain a focus given a new share buyback programme and an estimated future dividend yield of 2.3%. 

For now, and given its alignment to the provision of food in what are still highly uncertain economic times, investors are likely to keep backing this solid business.

Positives: 

• Diversity of both customer and geographical location
• Structural growth opportunity 

Negatives:

• Food costs can be volatile
• Currency movements can impact

The average rating of stock market analysts:

Strong hold