Thursday, 11 June 2015

BUY: WPP (WPP)--Doubling Up on a Global Media Giant

Price: 1482.3
Shares: 43
Predicted annual dividend income: £18.67 (this purchase) and £36.47 (entire holding)

With the Greek Crisis still looming large over Europe, understandably the markets have been a little jittery. Of course, not ideal in general, but for long-term dividend investors it all looks a bit rosier.

Lower share prices mean higher yields.

As a result, I have been looking at my portfolio for where to put my next tranche of cash which has been supplemented by a bonus from work and additional funds pulled from the sale of unwanted items (more on this in another post).

So what was my course of action this time? Well, chiefly I have been looking at my portfolio as it currently stands as I have been particularly interested in beefing up one of my current holdings (with a particular emphasis on those currently below my original purchase price). I had a couple of thoughts. I could top up:
  1. My pharmaceutical holdings--GlaxoSmithKline (-10%) and AstraZeneca (-3.7%)--both of which look attractively priced.
  2. Drinks maker Britvic (-4%) whose share price drop now sees it likely yielding comfortably in the 3 to 3.5% range  this year and next;
  3. One of the high-yielding insurers: Legal & General (-4.5%), Old Mutual (+9%) or Amlin (-4%). All looks great purchases for the long run.
However, in the end I went for the media and advertising giant, WPP.  Let's see why here.

WPP and my Portfolio

I bought into WPP back in April this year. Since then it has hovered around my purchase price with little in the way of movement. However, of late it has dropped a bit more. This is in part due to the Greek Crisis but most directly due to it going ex-dividend earlier this month. 

All told, I was a little over 6% down on my original purchase price. Some of my other potential top ups are on a larger capital drop (GSK is about 10% down). But as my little summary above highlights, WPP sits fairly in the middle of the range of companies I was considering topping up on.

Why Top Up WPP?

This is a good question. My general reasons for finding WPP attractive were expressed in my original post. To summarise:
  1. Strong focus (and success) in lucrative emerging markets where marketing has a low penetration at present;
  2. Pushes into data and digital areas of advertising;
  3. Strong earnings and dividend growth over a two decade period. 
However, what about this specific purchase? In reality it is because the decline does not seem to be obviously warranted. As we will see later, analyst earnings and dividend predictions seem stronger than during my original purchase.

Also, on the day of my purchase (9 June) WPP released a trading statement for the first 4 months of the year. This contained all sorts of encouraging detail:
  1. 8% increase in revenue (7.1% at constant currency)
  2. Emerging Market revenue growth of 10%.
  3. Sales margins were up on last year.
Also, they indicated their shareholder friendly activity was continuing apace. In the first 4 months of 2015 they engaged in a share buyback which saw 1.1% of the share capital purchased back by the company (incidentally, at a higher purchase price than my current purchase price: 1507p).

Second, they indicated a nice change to dividend payout policy. Since 2013 they have been progressively pushing the dividend payout ratio up to 45% of earnings. This they achieved in 2014: one year ahead of their 2015 schedule.

So what next? Well this is what they suggest:
The achievement of the targeted 45% dividend pay-out ratio one year ahead of schedule has raised the question of whether the pay-out ratio target should be raised further. Your Board has decided to increase the dividend pay-out ratio to a target of 50%, to be achieved by the end of 2017.
That is a very attractive prospect (as we will see shortly).

Even Better Value!

WPP was already looking pretty good value when I first bought into them. However,  a combination of (modest) strengthening of analyst predictions and weakening share price has made this even more pronounced. For this year they look like this:

EPSP/E Ratio
Difference (%)7.20

That means that since April it has dropped to a consensus PE of 15.6 from 16.6. The same applies to the lowest predictions. It has dropped from 17.1 in April to 16.1 today. Excellent noises for a fresh investment then!

For next year we have a similar situation:

EPSP/E Ratio
Difference (%)8.95

Again we see the analysts becoming more upbeat with their predictions. An April consensus PE of 15.2 has dropped to a current 14.2. Again, these are very strong predictions which are heading--rather nicely--northwards (unlike GSKs, for example).

Even Better Dividend!

In April the predicted yield was about 2.76% and 3.05% on a dividend of 43.26p and 47.86p per share. On the same predicted dividend this purchase would yield 2.92% and 3.23%. Already better.

However, with the new proposed dividend payout guidelines offered by the company we should see dividends covered by earnings not 2.05 times (as above)  but 2 times. 

As a result, presuming WPP pay out 50% of the earnings as dividends going forward (in reality, it will likely be staggered) we should see on consensus earnings predictions dividends of 47.35p and 51.94p per share for this year and next.

This would be a yield of 3.19% and 3.5%. Very nice indeed.

Of course, if we assume the pace is more like it was with the previous payout ratio growth the likeliest payout ratio for this year would be around 47% rather than 50%. This would throw out about 44.5p per share. That is a yield of about 3% on this purchase price. Again, not bad at all!

Other Numbers

Now, being just a trading update the information on 9 June offers little in the way of additional financial information. However, they did give an update on debt levels which suggests that debt-to-equity ratio has dropped from 0.64 when I first bought into them to 0.48. This is good news. However, 0.64 was hardly an over-leveraged situation.

Cash holdings--as well as cash generation--remains impressive. According to my calculations they have about 173p per share in cash. That is about 11.5% of the share price.

All told, this is a company still in very rude health and with a strong period of growth still looking likely to follow.

WPP and My Goals

So how does my newest WPP purchase fit into my investing goals for 2015? As before, it is not a massively helpful contribution in the short term. 

First, even with the likely hefty yield increase moving forward due to a mixture of earnings growth and a growing payout ratio the yield is still comparatively modest. As a result, it will draw me a little further from my goal of maintaining a yield of around 1.25 times the FTSE All Share yield. 

At present the FTSE All Share yield is 3.34% which makes my target a pretty hefty 4.18%. I have had this goal in operation about a month now. Soon I will be making an update on it to see where it needs to be tweaked and adjusted. But obviously, the WPP purchase will not help me in the short-term reach this goal.

However, as many of you probably know, I have been increasingly looking to insert more high growth companies into my portfolio. WPP certainly fits that bill. As yet, I have no investing goal in this regard. However, this may change soon.

Regarding the £800 dividend income for the year WPP helps a little. However, as I have already missed the final dividend payment during the 2015 calendar year I will only see the interim one with this new addition. However, although more modest, it will be a welcome addition to my grand dividend total. What is more, I seem to be--so far--well on track for this goal.

The beta has risen a little since my first purchase (from 1.16 to 1.19). So, once again, this slightly edges me away from my goal of having a beta of 0.85 or less for my portfolio. That being said, at present my portfolio value is sitting around 0.8 (including this purchase) which means I am nicely on track.

Finally, my goal of pushing my trading fees for the year below the 1.3% mark of all I invest in the year. This purchase is very helpful in this regard. Because WPP is not registered in the UK it is not subject to the 0.5% stamp duty charge. 

As a result, the trading fees on this transaction amounted to a delightfully small 0.78%. This will help no end and has helped push my current trading fees for this year down to 1.23%. Pretty solid progress.


All in all, WPP seems like another compelling addition to my portfolio. It has now sky-rocketed to become my 5th largest holding.

As it continues to be in excellent financial health, continues to present a superb growth profile and increasingly looks like an excellent long-term income growth stock I am pretty delighted to double up on my original purchase.

What do you think?

Do you hold WPP? Are you looking to top up your holding in the company or reduce exposure?

Have you topped up another of your current holdings? Be fascinating to hear what you have done.

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[Image reproduced from WPP]


  1. Nice write up DD - WPP were on my short list, except they were chosen by Lady Luck! I shall be buying at some point though!

    1. Lady Luck perhaps does not like Martin Sorrell much, then! (Though she seems to have been rather generous to him in other ways!)

      WPP still looks very attractive to me for the long-term. My only concern is what will happen post-Sorrell. I am not concerned in the manner some are (the company is too big now for a single person to be that "essential" to the operation). However, it certainly would be useful to know what the plan is for who will replace him. Internal would be advised. After all, they have nearly 20 very senior members who really "know their onions" and so would be good replacements.

      We will see! In the meantime the company looks in fine fettle!

  2. You have done your homework on WPP again. It definately does look like an attractive buy. I have a lack of funds available right now or I would be strongly considering them too. If I do get any spare cash together it will be going to Legal and General

    1. Thanks, Laura. Yes, it is one of those excellent looking companies. Looks great over the short term and long term.

      Legal & General is also looking attractive. It is still hovering around my purchase price (I wrote up about it last month). As I say, I did consider topping that holding up as well myself.

      Good luck with your choice. There are innumerable others out there looking very attractive indeed for the long term.