Red Flags in Mature Businesses: Why Reach PLC is a Value Trap

In the world of investing, few metrics are as telling as Return on Capital Employed (ROCE) and capital employed trends. These figures reveal whether a company is efficiently deploying its resources or stagnating in a rut. For Reach PLC (LON:RCH), the signs are stark: declining ROCE and flat capital employed suggest a business in decline, even as dividends strain cash flows. Contrast this with Future plc (LON:FUTR), which maintains healthier metrics and analyst optimism. Let's dissect why Reach is a value trap—and why investors should look elsewhere.

The ROCE Decline: A Telltale Sign of Decay

ROCE measures how effectively a company generates profits from its capital base. For Reach, this metric has plummeted from 12% in 2020 to 9.3% in 2024, falling below the media industry average of 11%. Meanwhile, competitors like Future have stabilized ROCE around 10–11%, with peaks as high as 12.5% in 2022.

This divergence matters. A falling ROCE indicates diminishing returns on existing assets—a hallmark of mature or declining businesses. Reach's 9.3% ROCE signals that its core operations (e.g., print and digital media) are struggling to adapt to a shifting market. Shareholders have noticed: the stock has lost 20% of its value over five years, underscoring investor skepticism.

Stagnant Capital Employed: No Growth, No Hope

Capital employed—the total assets minus current liabilities—reveals how much a company is reinvesting. Reach's capital employed has remained flat at £1.05 billion since 2020, despite a media landscape demanding digital transformation. This lack of reinvestment suggests a business stuck in place:

• Reach's capital employed: £1.05 billion (2020) vs. £1.05 billion (2024).
• Future's capital employed: Grew from £468 million (2020) to £1.09 billion (2025), funded by equity growth.

Future's expansion into U.S. digital markets and tech-driven content underscores its growth mindset. Reach, meanwhile, has relied on cost-cutting (e.g., a 6.5% reduction in operating costs in 2024) rather than strategic reinvestment. A business that stops growing its capital base risks becoming obsolete.

Dividend Payouts: A False Comfort

Reach's dividend payout ratio—43.2% of earnings—may seem manageable. But the cash payout ratio of 163% tells a darker story: dividends are funded by borrowing or dipping into reserves. Future, by contrast, retains earnings aggressively, with a payout ratio under 5% since 2021, allowing reinvestment in growth.

A high dividend payout can lull investors into complacency, but it's a risky strategy. If earnings falter, dividends may be slashed, triggering a sell-off. Reach's reliance on cash flow to fund payouts makes this scenario likely.

Analyst Sentiment: Future's Edge

Analysts are skeptical of Reach's trajectory but bullish on Future's potential:

• Reach:
• Risks: Earnings volatility, cash flow strain, and a 28% drop in stock price over 12 months (as of May 2025).

• Analyst consensus: “Hold” due to valuation concerns and execution risks.

• Future:

• Upside: U.S. market expansion, a £55 million buyback program, and a 5.08% buyback yield.
• Analyst consensus: “Buy” ratings from firms like Jefferies, citing its digital focus and low payout ratio.

Future's 2023–2025 stock price rose 22%, while Reach's declined—a stark reflection of investor sentiment.

Conclusion: Avoid the Value Trap

Reach PLC is a classic value trap: cheap on paper but burdened by declining ROCE, stagnant capital, and unsustainable dividends. Investors lured by its 10.2% dividend yield risk a reckoning if earnings continue to falter.

The better bet? Future plc. Its healthier ROCE, capital growth, and conservative dividend policy position it to capitalize on digital trends.

For investors, the lesson is clear: avoid businesses clinging to the past. Mature companies like Reach, with no growth in capital or returns, are not bargains—they're dead ends.

Investors should prioritize firms like Future that reinvest wisely and maintain robust metrics. The future of media belongs to those who adapt, not those who cut costs to the bone.