Has WPP’s share price fall created a dividend growth opportunity?

WPP shares dividend

I’m a big admirer of advertising giant WPP (LON:WPP) (WPP.L). The company is the largest advertising company in the world by revenue and has an impressive list of clients including Ford, Microsoft and Johnson & Johnson.

WPP generates around 70% of its revenues in the UK, Europe and the US, but also has exposure to faster growing economies such as China and India. Over a third of the company’s revenues are currently related to digital advertising, so the company is well placed to take advantage of this high growth area as the advertising landscape changes in the future.

WPP operates a very active acquisition policy, and this has enabled the company to grow consistently in the past. For example, over the last three years revenue has grown from £11,019m to £14,389m, a compound annual growth rate (CAGR) of a robust 9.3% and earnings per share in this time have risen from 84p to 115p.

However, the company warned in March that global economic and political uncertainty may lead to a slowdown in growth this year, and as a result, its share price has fallen from above 1,920p to 1,650p today. Has this share price fall resulted in a dividend opportunity?

Excellent dividend growth track record

The first thing to note about WPP is that the company has an excellent dividend growth history. Over the last ten years, the company has increased its dividend from 11.2p to 56.6p, a compound annual growth rate (CAGR) of an incredible 18%. That really is a dividend growth investor’s dream.

Last year’s payout of 56.6p, equates to a 3.4% yield at the current share price, which while not the highest yield in the FTSE 100, is not a bad yield when you consider the growth rate of the dividend.

City analysts have forecast payouts of 63.0p and 67.7p for this year and next year, growth of 11.4% and 7.4% respectively, and on projected FY2017 earnings of 126.1p, dividend coverage is a healthy 2.0 times.

Valuation

At the current share price of around 1650p, WPP’s forward looking PE ratio is 13.1, which seems very reasonable for a company with such an impressive history of revenue and dividend growth.

While we could see more share price weakness if global markets experience a correction (a high probability in my view), in my opinion WPP is approaching a level where the dividend on offer is starting to look attractive.

Disclosure: Edward Sheldon, CFA has no position in 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.

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