In the last year, I have added both ITV (LON: ITV) and WPP (LON: WPP) to my personal dividend portfolio. Both were picked up for their generous dividend yields at what I thought were attractive valuations.
However, this week, both FTSE 100 companies have been sold off fairly heavily, after releasing FY2017 results.
Should I be concerned?
Let’s take a closer look at each company’s results and dividend prospects.
ITV’s results were described by new CEO Carolyn McCall as “strong” in a challenging environment.
Total external revenue rose 2% to £3,132m, while adjusted earnings per share declined 6% to 16.0p.
While the market didn’t like the results, with the share price falling from around 175p back to 160p, there were several positives, in my view.
For example, while broadcast & online revenue fell 3%, revenue from the content side of the business – ITV Studios – climbed 13%.
Furthermore, revenues from sources other than spot television advertising climbed to 56% of total revenues, showing that ITV is a significantly more diversified business these days.
I was also pleased to hear that the dividend was hiked 8% to 7.8p per share, although there was no special dividend this year. At the current share price, the 7.8p payout equates to a trailing yield of 5.1%. Dividend coverage was 2.05 times, suggesting that the company can clearly afford that payout. The results stated:
The Board has proposed an ordinary dividend of 7.8p, an increase of 8%, reflecting our confidence in the underlying strength of the business and the outlook for 2018. This is in line with the Board’s commitment to a long-term sustainable dividend policy and for ordinary dividends to grow broadly in line with earnings, targeting dividend cover of around 2x adjusted earnings per share over the medium term.
An 8% dividend increase in the current environment is a good result, in my opinion. That signals to me that management has confidence in the business model, even if the company is currently undergoing a ‘strategic refresh’ to define its strategy for the future.
ITV’s trading environment could remain challenging in the short term, however, given that the company has increased its dividend again, I’m not too concerned.
I’ll be holding onto my shares for now and continuing to pocket the big dividends being paid out.
Shares in global advertising giant WPP were also hit hard this week after the company released its FY2017 numbers.
“2017 for us was not a pretty year, with flat like-for-like, top-line growth, and operating margins and operating profits also flat, or up marginally” – WPP CEO Martin Sorrell
Like-for-like client billings fell 5.4% for the year, while revenue from those billings declined 0.3% to £15.3bn. Sorrell stated:
“The major factors influencing this performance were probably the long-term impact of technological disruption and more the short-term focus of zero-based budgeters, activist investors and private equity than, we believe, the suggested disintermediation of agencies by Google and Facebook or digital competition from consultants.”
Despite the fall in revenues, the company still managed to increase its earnings, with headline diluted earnings per share rising 6.4% to 120.4p. In constant currency terms, the increase was 2.7%.
And importantly, the company increased its full-year dividend payout by 6.0% to 60.0p per share, although the final dividend was only increased 0.7%. At the current share price that equates to a trailing yield of 4.7%. Coverage here was also healthy, at over two times.
There’s no doubt WPP is experiencing an extremely challenging period at present. Companies have cut back on their advertising budgets and technological disruption has increased uncertainty within the advertising industry.
Yet, given that the company is still increasing its dividend payout, I’m happy to hold onto my shares for now.
Disclosure: Edward Sheldon, CFA owns shares in ITV and WPP.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.