I’m sitting on a decent pile of cash within my personal portfolio at present, however, during July, I took the opportunity to add one stock to my portfolio.
That stock was WPP (LON: WPP) (WPP.L).
WPP shares have been sold down recently, from 1,920p back in March to around 1,550p today, a decline of approximately 20%. At that price, the stock is trading on a forward-looking P/E ratio of 12.3 and a forward-looking yield of a healthy 4.1%.
Here’s a concise look at why I bought the stock.
WPP is the world’s largest communications services group, generating revenues of over £14bn last year. Through its operating companies the group provides a comprehensive range of advertising and marketing services, employing over 205,000 people across 112 countries.
The group has an impressive client list, and currently services 360 of the Fortune Global 500 companies, all 30 of the Dow Jones 30 and 78 of the NASDAQ 100.
While the company currently generates approximately 70% of its revenues from the US, UK and Europe, the remaining 30% comes from fast-growing emerging economies in Asia, Latin America, Africa & the Middle East and Central & Eastern Europe. WPP has plans to boost its exposure to these economies, aiming to increase the combined geographic share of revenues from these regions to 40%-45% of revenues. The group also has significant exposure to the fast-growing area of digital advertising.
The company operates a very active ‘bolt-on’ acquisitions strategy, and this helps to generate revenue and earnings growth even when organic growth is subdued.
WPP’s long-term targets include:
- Generating above industry revenue growth
- Generating headline diluted earnings per share (EPS) growth of 10% to 15% per year – from revenue and net sales growth, margin expansion, strategically targeted small and medium-sized acquisitions and share buybacks.
The company has been a consistent performer over time, as the chart below shows:
The stock has also been an excellent long-term wealth generator for shareholders as the graphic below illustrates.
Over the last five years, revenue has increased from £10.0bn to £14.4bn and earnings per share have risen consistently. While revenue is forecast to drop this year, net profit is expected to rise by 14%.
Dividend growth champion
The long-term growth in revenue and earnings has enabled WPP to pay out an increasing dividend over time.
Indeed, the dividend has been increased every year over the last decade except for 2009 (the GFC) and the payout has increased from 11.2p per share in FY2006 to 56.6p per share in FY2016.
That growth equates to a compound annual growth rate (CAGR) of an incredible 18%. Looking forward, I’m not expecting that level of growth in coming years, however, consensus dividend growth estimates of 11.1% this year and 7.0% next year are still very reasonable.
The current estimate for the FY2017 dividend is 62.9p, which at today’s share price, equates to a yield of 4.1%. While that’s not the highest yield in the FTSE 100, that level of yield is attractive in my view, and with dividend coverage estimated to be 2.0 times this year, the dividend looks sustainable.
Share price correction
WPP shares enjoyed a strong run between September 2015 and March 2017, rising from 1,300p to 1,920p, a gain of almost 50%.
However, sentiment has shifted in the last few months for several reasons.
The company was cautious in its outlook when it released full-year results in March, and then in June the stock was hit by the double-whammy of a cyber attack and a broker downgrade from Exane BNP Paribas. The broker stated that large advertising firms need to evolve more quickly.
With the stock falling 20%, value from a dividend investing perspective has emerged in my view, with the forward-looking yield of 4.1% and dividend cover of 2.0 standing out as attractive.
A glance at the chart reveals that the relative strength indicator (RSI) recently fell below 30, and when it has fallen to that level in the past it has often been a good entry point.
In the short term, WPP’s share price may continue to fall further, but over the long term, I believe WPP’s digital capabilities and exposure to growth markets should propel revenues and earnings in the right direction. This in turn should facilitate future dividend growth.
Disclosure: Edward Sheldon, CFA owns shares 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.