Investment Thesis
Robert Half International Inc. (NYSE:RHI) is an asset-light staffing and consulting firm with a strong balance sheet. It has no debt, has delivered a close to 10X EPS growth in the last decade, and has consistently increased its dividends for the past 16 years. For those who believe in the long-term resilience of the US economy and are looking for a dividend play, RHI presents a solid investment proposition.
About RHI
Robert Half International is the world's largest accounting and finance staffing firm. It deals with 3 main segments: temporary and consulting staffing, permanent placement staffing, and risk consulting/internal audit service. The company is a member of the S&P500 and is based out of Menlo Park, CA. Robert Half International has close to 19,000 employees and more than 400 locations worldwide.
The company derives 77% of its revenue from the US and the remaining 23% from international markets. RHI is present in South America, Europe, and Asia. Among the international markets, Europe makes up the largest chunk of the overseas business.
RHI's temporary staffing segment accounts for 74% of total revenues. Permanent placement makes up only 9% while the audit and risk consulting segment contributes 17% of the total revenues. So the business is US-centric and heavily focused on temporary staffing and consulting services.
Recent Performance
Over the past 5 years, the company has seen sales grow at a CAGR of 5.2% from close to $4.7 billion to over $6 billion. Operating margins have also been very steady, at around 10%, throughout this time. All three of RHI's segments saw revenue growth in 2019. The US unemployment rate, as of December 2019, was at a historic 50-year low of 3.5%. The combination of a strong economy and a significant demand for skilled talent have worked out in RHI's favor.
Over the last 5 years, the company has returned substantial money to shareholders via $577 million in dividends and $1.1 billion in share repurchases. RHI repurchased about 4 million shares in 2017, about 5.6 million shares in 2018, and about 4.2 million shares in 2019. All the buybacks have resulted in a significant reduction in the number of shares outstanding, down from roughly 131 million shares in 2015 to approximately 115 million shares in December 2019. This reduction in the shares outstanding has also played its part in significantly boosting the earnings per share number every year.
Being an asset-light people-heavy business, RHI has limited requirements for capital expenditure. Its total Capex for 2019 was around $90 million and that included expenditures for technology and cloud computing upgrades. RHI expects to spend around $100 million next year towards Capex.
Interestingly, RHI has no short or long-term debt. Short-term and long-term capital leases account for around $270 million. Additionally, the company has $270 million in cash and cash equivalents. So the balance sheet looks very strong indeed.
Valuation
The current valuation of RHI seems fair. The stock isn't a Ben Graham-type of a value stock. The price to book ratio is 5.7, which is pretty high. However, being an asset-light company, the value of tangible assets on the balance sheet is low and the P/B ratio tends to be higher in such businesses. Besides, the ROE has risen to over 40% over the last two years while the P/B ratio has dipped below 6. A falling ROE and a rising P/B ratio is a red flag, but a high ROE and a falling P/B ratio is a positive sign.
The P/E multiple is 14.53. However, when compared with historical averages, the P/E multiple is significantly lower at the moment. Even the price-to-cash flow ratio is about 20% below the 5 and 10-year averages. In fact, all four valuation ratios are currently below their historical averages.
Source: Morningstar
Dividend Yield Analysis
RHI has had a consistent track record of uninterrupted and growing dividends for the last 16 years. It has grown its dividends every year since 2004 at a CAGR of 11.6%.
source: Investor Presentation
The dividend yield for RHI currently stands at 2.09%. That is the same level as was seen in the 2010 to 2013 time period. The dividend has seen a strong uptrend since mid-2018, when it was almost 1.4%. This trend, when looked together with the fact that current valuation multiples are below historical averages, seems to suggest a softening in valuation as per the dividend yield theory.
Over the longer term, the dividend has been somewhat volatile, going as high as 2.7% in 2011 and touching a low of 1.2% in 2015.
source: Zacks
Dividend increases are great. But, the question then is whether they are sustainable over the long term. RHI's dividend payout ratios have hovered in the 30s for the last 7 years. The dividend to free cash flow ratio has been below 30% for the last 4 years.
These ratios seem to suggest that the dividend payouts have been quite sustainable, leaving enough cash for the company to reinvest and grow its business. There is a good chance of future growth in dividends if such conservative payout ratios can be maintained.
source: Morningstar
Future Prospects
RHI's business model is closely linked with the health of the overall economy. The US economy is currently going very strong and there are no indications of any disruptions. The treasury yield curves keep hinting towards an impending recession, but so far the economy has been doing well and there are more job openings than the number of hires since 2015.
RHI also has a good reputation in the industry. Forbes magazine has listed the company as one of the Most Admired Companies for 21 consecutive years. The company has several other awards and recognitions to its name. A good brand name and reputation will aid the company in its future.
RHI has a very small presence in the Asian region. The Asia-Pacific region is a high-growth region in terms of growing economies and staffing requirements. The company, therefore, has an opportunity to increase and sustain its growth through such promising markets.
Investment Risks
The staffing services industry is a highly competitive one. The primary reason for this industry characteristic is the fact that the entry barriers are very low. Competitors with greater resources can enter this industry at any time and increase competitive intensity.
Additionally, at least in the case of RHI, there are very few long-term contracts. Therefore, there is no guarantee that the revenues flowing in today will also continue to do so in the future.
Human resources are very much dependent on the overall sentiment in the economy. During weaker economic periods, the staffing needs of companies (RHI's clients) tend to go down. This trend is quite evident in the company's sales chart in which clear dips in revenues can be observed in 2002-2003 (post the tech bubble) and 2009-2010 (post the GFC). Therefore, investors must remember that RHI's business will be sensitive to the overall health of the US and the global economy.
source: Investor Presentation
Robert Half International owns a subsidiary named Protiviti. The subsidiary's business is mainly in the audit and regulatory compliance service segments. Any legislative developments which remove regulations (for e.g. provisions of Sarbanes-Oxley) can negatively affect the business of the company.
Conclusion
RHI has an economy-dependent business model. However, what stands out is the fact that the business has bounced back after every major recession only to scale newer heights. Sales growth has been steady while margins have remained quite stable over the longer term.
The company management seems quite shareholder-friendly as it has made increasing dividend payouts for 16 years running. The dividend payout ratio is also quite conservative at around the 30% mark. The management has also conducted a strong share repurchase program, which has significantly reduced the number of shares while boosting the earnings per share.
Valuation-wise, the company looks fairly priced. Most valuation ratios are below the 5 and 10-year averages. The dividend yield has also gone up over the last 18 months, suggesting that this could be a buy-at-the-dips kind of an opportunity to enter the stock.
