This thought swings into mind contemplating first-half results from the nation's biggest cleaning company, Mitie (MTO). Of course, Mitie does not refer to itself as a cleaner. Its bosses label the core activity 'facilities management', and, true, this role, which generates about three-quarters of the group's £2.2bn annual revenue, also includes providing services such as waste management, pest control and security staff. Mitie does other stuff, too; in particular 'healthcare', which is a euphemism for providing home visits for the aged and the infirm.
What almost all of its activities have in common is that they are low value-added and labour intensive, where the potential to improve profitability via better technology is almost entirely absent and economies of scale offer limited scope. Not that you would think so if you relied on the relentlessly upbeat message of Mitie's bosses, where chief executive Ruby McGregor-Smith said of the 12 per cent drop in first-half pre-tax profit that "Mitie has had a positive start to the year," adding that the £6.3m swing from profits to losses in the healthcare division was simply an opportunity to take "positive action to reshape the business to meet market opportunities".
You have to admire her chutzpah. But there is no escaping the reality that Mitie is no longer the high-growth business it once was or that, perhaps, its bosses assume it still to be. It is five years since its year-on-year percentage growth in sales was in double figures; its operating profits peaked on the right side of £100m four years ago and won't be there again any time soon and group operating profit margins, which - with one year's exception - had always been above 5 per cent, will be below that level this year for the fourth year running.
So the reality of running Mitie - as with similar companies such as G4S (GFS) and Serco (SRP) - is one of unremitting grind where the customer is always king and the gap between revenues and costs always gets squeezed. It's enough to scare the competition away.
And therein lies the paradox of low-growth markets - that they are more attractive than instinct suggests because they deter competition. So, paradoxically, they can offer better potential than markets with bright prospects, where dazzling new entrants queue up. But the attractions only apply to those operators that are already well established, the ones that have the management and the systems in place and the contracts signed - Mitie's £8.5bn order book is worth almost four years' worth of revenue. From this, such operators gain competitive advantages - the close ties that make it difficult for customers to leave when contracts come up for renewal and the revenue already in the bag, which means they can undercut all but the most foolish new competitors on price.
Meanwhile, if Mitie's growth prospects are dull, its ability to generate cash looks little diminished. In the 12 years 2003-15 it always generated enough free cash to cover its dividend payments, although the ratio was at its closest - 1.4 times - in the most recent financial year. However, given that cash conversion - a company's ability to turn accounting profits into cash - has been on an upward trend in the past five years then there is a good chance that dividends can continue to creep upwards, too.
In other words - and despite my reservations about Mitie (see also Bearbull, 22 May 2015) - the shares may continue to do a job in the Bearbull Income Portfolio. True, I could not recommend buying around the current level - 311p - but those who already have them might conclude there are many worse ways to pick up a 3.9 per cent dividend yield.
And there may be worse ways to pick up a 5.5 per cent yield than via shares in currency manager Record (REC), although I do wonder. Once again Record has managed to disappoint and the best to be said about first-half results that showed an 8 per cent fall in pre-tax profits to £3.3m is that they had been well flagged. Also, the worst performance came from new-and-fancy 'seed' funds that are partly owned by outside investors, thus minority interests took a hard hit and, ironically, EPS came out 11 per cent up on the previous first half.
In theory, these are good times for Record - all that currency volatility and worries about so-called 'monetary policy divergence', which means that US interest rates are likely to rise first, should generate interest in its hedging services. Even so, funds under management fell 6 per cent in the first half and Record's bosses are sufficiently cautious to warn that 2015-16's dividend will be the same as last year's 1.65p.
Against that, the dividend only costs £3.7m, an amount that continues to be well covered by free cash flow. That leaves untouched Record's £33m of cash and Treasury bills, which is more than half the £64m market value of its equity, with the shares at 30p. So Record continues to offer both the hope of a fat one-off distribution and a sustained recovery in its operation. True, patience is eventually exhausted but, for now, its shares remain a high-yield recovery play, so I'll continue to nurse the 22 per cent loss I'm carrying in the Bearbull Income Portfolio.
