In the ivory-towers of investing academia, there’s constant debate about the “principal-agent problem”. Essentially it’s the worry that management (the agent) are more interested in hitting the next bonus target than the long-term financial health of the company and well-being of its shareholders (the principals).
One common solution is to invest in companies which are still run by their founders, or where management have large stakes. It’s not a one way track to riches though. Sports Direct is majority owned by founder Mike Ashley and recent performance has been dire. Nonetheless, owner-management can be a useful indicator that the interests of management and shareholders are closely aligned.
Below we take a look at three companies where founders are still at the helm and have delivered good results for shareholders. Please note that yields where quoted are not a reliable indicator of future income and the value of shares will rise and fall, so investors could get back less than they invest.
Ted Baker – the visionary
Ray Kelvin, the ‘Closest Man To Ted’, remains at the helm of Ted Baker almost 30 years after launching the first shirt shop in Glasgow. The quirky upmarket retailer has become a global lifestyle brand covering everything from lingerie to sunglasses with 490 Ted stores and concessions worldwide.
Almost uniquely for a major fashion brand, Ted Baker spends practically nothing on traditional advertising campaigns, relying instead on Mr Kelvin’s vision of a distinctive, quality product that sells itself. As CEO with a 35% stake in the business, it’s a vision that’s likely to continue steering the business for some time to come.
Ted’s distinctive patterned products are more than capable of standing out from the competition, and that has allowed the group to roll out department store concessions rather than capital intensive stores of its own. Fewer than one in five stores in the current estate are conventional Ted Baker shops.
Product strength has also allowed management to make use of third parties to push into new territories. Wholesale accounts for about 24% of revenues, while licencing deals mean the Ted Baker stamp has been attached to everything from stationery to wall tiles. Underdeveloped territories are parcelled out under territorial licencing agreements.
We like what Ted does. Offering affordable luxury to the middle classes has allowed it to maintain healthy margins and give it some resilience to economic headwinds. The recent purchase of its head office, ‘the Ugly Brown Building’, has pushed up net debt. However, expansion has generally required little in the way of capital and earnings are forecast to continue growing by double-digit percentages in the coming years.
At present the shares offer a prospective yield of 2.1%, and trade on a price/earnings ratio of 21.6 times next year’s earnings, around 21% above the long run average.
WPP – the M&A king
In 1985 the finance director of Saatchi & Saatchi, then the UK’s leading advertising agency, left to buy a stake in, and become CEO of, a small listed wire basket manufacturer called Wire and Plastic Products Plc. 30 years later the renamed WPP is the world’s largest advertising agency, with 200,000 employees. Sir Martin Sorrell is still the CEO.
The transformation from ailing industrial minnow to media leviathan has been driven by a steady stream of M&A activity. Early deals saw Sorrell snap up Mad Men era advertising giants including J. Walter Thompson and Hill & Knowlton, but the group has remained relentlessly predatory, completing 56 acquisitions and investments in 2016 at a total cost of £697m.
WPP’s cash conversion is formidable. Not only does that mean it can finance most of its acquisitions organically but has also allowed it to deliver double-digit compound annual growth in the dividend over the last 20 years. Whilst this is impressive, there are no guarantees this level of growth will continue.
WPP keeps its ear close to the ground and will buy promising smaller agencies in markets or sectors that it thinks has potential. Data, digital and faster growing economies are particular areas of focus at the moment, with the group looking to generate 40-45% of total revenue from these areas over the next four to five years.
The global stable of advertising agencies, market research shops and PR consultancies form a fairly loose conglomerate. It’s not uncommon for management to retain stakes in the businesses WPP buys, and agencies can end up competing against each other for business. However global reach and a diverse talent pool means that it can match more or less any client’s needs. Tying together expertise from more than one agency is increasingly central to its offer for lucrative global giants, including all 30 Dow Jones constituents.
Look back at earnings per share over the financial crisis, dotcom bubble and recession of the early 90s and you can see that WPP isn’t immune to the woes of the world. EPS fell substantially, but Martin Sorrell has steered the group through each. These days his stake in the business is small, just 1.75%, but he looks set to remain at the helm for some time yet.
James Halstead – the family business
The ultimate owner managed business is of course the family business. With a large proportion of wealth tied into the business’ success, management and shareholder interests should be closely aligned. All the while, a desire to pass on the business to the next generation helps keep an eye to the long term.
Vinyl flooring manufacturer James Halstead is a family company through and through. Chairman Geoffrey Halstead and CEO Mark Halstead, grandson and great-grandson of the founder, are the second and third largest shareholders and overall nine of the top twenty investors bear the Halstead name.
Products range from design-led retail products to specialist industrial flooring. These need replacing regularly, and that should make its products less cyclical than new build-focused materials such as bricks. Meanwhile, the 67% of sales that come from outside the UK should help insulate the business against the worst of any UK-centric downturn.
James Halstead has proved to be a steady performer in recent years. Although revenue growth has been low, (up 6% over the last 5 years) profit before tax has risen almost 18% over the same period, with the group keeping a firm handle on costs. As a UK manufacturer, the company has enjoyed a boost in international competitiveness from lower sterling.
The company says that it believes “the true measure of a business is return as measured by dividends paid to shareholders”. In this regard, James Halstead is a stand out business. Having grown the dividend every year since 1995 the shares currently offer a prospective yield of 3%, although of course there is no guarantee that this impressive record will continue.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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