31 May 2021

ESG: lower wages, faster rises?

There are 28 companies amongst the 465 stocks under AlphaValue coverage that will pay average wages of below €30k a year. This sticker includes social security costs met by employers meaning that the pre-tax fortune brought home is at best €20k-€23k.

These staff tend to belong to the “second line” that faced the pandemic i.e. health support, security services, logistics, retail and hospitality. In the US, they seemingly wish to stay home for now, while European restaurants are also screaming bout the lack of cheap labour.

Such a state of affairs which is as recent as the end of western lockdowns is likely to be transitory i.e. those staff are unlikely to be so unionized that they will impose higher wages that would percolate into other layers of the labour force. But such personnel may have a rare window of opportunity to be heard, if only a bit.

It is a telling sign that a big hotel belonging to the Accor stable in Paris has just capitulated after some 2 years of strikes by room maids on the issue of better working conditions.

The list of 28 stocks inevitably tracks difficult, labour-intensive business models with limited fixed assets and tight cash flows. Well managed, the return on limited capital can be superb but the line is thin between running on all cylinders and falling by the wayside. This is why governments across the western world stepped in immediately as of the onset of the pandemic.

Government support has opened a debate which will not die with the pandemic. If labour intensive businesses can socialise their losses, should they not be required to share the good times (read higher wages/bonuses) and be equipped with more capital than wafer-thin equity? Court decisions about the limits of gig working across the globe also point toward the same conclusion: essential service staff cannot be left to rot in a pandemic and cannot be left to take to the streets. By voting with their feet on the Deliveroo IPO, institutional shareholders said essentially the same thing.

The following table is summarizing the business models (Fundamental strength), credit risk and sustainability of those 28 issuers in aggregate, dubbed ‘Modest Wages’ for the occasion.

Low wages and low odds of collective bargaining suggests that these firms would not do well on the S side of the ESG equation. This is right but only at the margin which is per se a positive finding: not all companies are pressuring their staff and low wages also tend to be driven by the geography of personnel. For instance, Inditex manufacturing is hardly concentrated in Munich. As ever on those qualitative matters, a serious pinch of salt is required before jumping to conclusions.

There are 5 firms that need to be mentioned as doing well to very well on the S scoring as provided by AlphaValue: Compass, Ferrovial, JD Wetherspoon, Sodexo and Mitchells & Butler. The opposite extreme is manned by Elior, Inditex, M&S, Rusal and Autogrill.

Beyond any naming of names, sooner or later shareholders are really concerned by the risk of higher wages, thereby putting at risk their FCF and dividends.

Not all firms with low wages have high operational leverage. We assume that the wage bill increases by 3% vs. the average of 2019 and 2021 (supposed to be 2 normal years) and match that to the 2022 FCF.

Companies with a worse-than-15% hit are the following. No big surprise obviously. But before jumping to quick conclusions, remember that there are thousands of ways to gauge that sensitivity and that some of those businesses (Compass, Teleperformance) have a history of being very well managed.

Impact of a 3% jump of wages on FCF

Before rushing for the exit, let us mention that ytd that list of 28 (unweighted) names has outperformed...

Modest wages are good to have