Is WPP the Ultimate Retirement Share?

Before you go, we thought you'd like these...
Before you go close icon

LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered, and annuity rates have plunged. There's no sign things will improve anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way to protect yourself from the downturn, however, is to build your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk, income-generating retirement fund (you can see the companies I've covered so far on this page).


Today I'm going to take a look at WPP (ISE: WPP.L) (NAS: WPPGY) , the FTSE 100 advertising and marketing giant that was founded by Martin Sorrell in 1985. Famous advertising names such as J Walter Thompson, Ogilvy, and Young & Rubicam have since been absorbed into the WPP empire, and the company now has operations in 108 countries.

Marketing gains?
Although WPP has delivered substantial share-price and dividend growth to shareholders, it has not managed to consistently beat the FTSE 100 over the last 10 years:

Total Return

2007

2008

2009

2010

2011

Trailing 10-Year Average

WPP Total Return

(6.3%)

(37.8%)

55.3%

32%

(12.3%)

6.5%

FTSE 100 Total Return

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

6.9%

Source: Morningstar. Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.

WPP's trailing 10 year average total return of 6.5% means that despite impressive headline figures in some years, the total return for investors owning WPP shares over the last 10 years has been marginally less than the 6.9% delivered by the FTSE 100.

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how WPP shapes up:

The basics

Year Founded

1985

Market Cap

10 billion pounds

Net Debt

2.5 billion pounds

Dividend Yield

3%

Five-year average financials

Operating Margin

11.6%

Interest Cover

4.4 times

EPS Growth

14.3%

Dividend Growth

14.4%

Dividend Cover

3.2 times

Source: Morningstar, Digital Look, WPP.

Here's how I've scored WPP on each of these criteria:

Criterion

Comment

Score (out of 5)

Longevity

It's still a youngster, but it operates in a mature sector.

3

Performance vs. FTSE

Pretty average.

3

Financial strength

Customers are demanding better value, but the fundamentals seem OK.

4

EPS growth

Admirable EPS growth has been helped by many acquisitions.

4

Dividend growth

Dividend growth has matched EPS growth.

4

 

 

Total: 18/25

In 2010, WPP announced that it was targeting a 40% payout ratio for future dividends and has so far been true to its word, increasing its latest interim dividend by 18% against an adjusted EPS growth rate of 13%. A score of 18 out of 25 is respectable, and WPP's dividend policy makes it an attractive candidate for a retirement fund portfolio, especially if you believe the company is likely to maintain earnings growth at or above inflation levels.

Expert selections
One way to identify great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to Dec. 31, 2011. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

The article Is WPP the Ultimate Retirement Share? originally appeared on Fool.com.

Roland does not own shares in WPP. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners