Head to Head: BSkyB vs. WPP

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LONDON -- In this series, some of your favorite FTSE 100 shares go head-to-head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are British broadcasting, broadband, and telephone services giant BSkyB (LSE: BSY.L) and global advertising and public relations conglomerate WPP (LSE: WPP.L) .

The markets have been in a fairly optimistic mood of late, and BSkyB and WPP have outperformed a modestly rising FTSE 100 over the past three months. The Footsie is up 3%, while BSkyB has climbed 8% and WPP 10%.

Let's take our seats at ringside.

Round 1: Earnings

Criteria

BSkyB

WPP

Recent share price

753 pence

858 pence

Last year price-to-earnings ratio

14.8

12.1

Current year forecast P/E

13.5

11.7

Four-year EPS compound annual growth rate

19%

10%

Current year forecast EPS growth

10%

4%

Operating margin

18%

12%

Sources: Digital Look, Morningstar, and company reports. Winner in bold.

WPP scores points for its lower P/E, but BSkyB edges the first round courtesy of its impressive earnings growth and superior operating margin.

Round 2: Dividends

Criteria

BSkyB

WPP

Last year dividend yield

3.4%

2.9%

Current year forecast dividend yield

3.7%

3.3%

Four-year dividend CAGR

11%

16%

Current year forecast dividend growth

10%

14%

Forecast dividend cover

2.0

2.6

Sources: Digital Look, Morningstar, and company reports. Winner in bold.

In a reversal of Round 1, BSkyB starts strongly, taking points for its higher dividend yield. But WPP fights back, scoring on superior growth -- and pinches the second round on better dividend cover.

Eagle-eyed readers might be wondering how come WPP has been able to grow its dividend so much faster -- at 16% -- than its earnings at 10%. The answer is: while WPP's dividend cover is very conservative, it has been even higher in the past -- as high as 3.7 four years ago. In other words, WPP's dividend growth has been driven partly by distributing more of its earnings to shareholders.

Round 3: Balance sheet

Criteria

BSkyB

WPP

Price-to-book ratio

13.2

1.6

Net gearing

93%

37%

Sources: Digital Look, Morningstar, and company reports. Winner in bold.

WPP finishes strongly, taking both points in the final round, giving the advertising group a two rounds-to-one victory. The points tally is: WPP, seven, and BSkyB, five.

Post-match assessment
This was quite a finely balanced contest, with historic and forecast dividend growth swinging it WPP's way. WPP can't go on forever cutting dividend cover to fuel growth above earnings, and with forecast cover at 2.6 the company has only a little bit left in the tank before reaching its target dividend payout ratio of 40% -- the reciprocal of cover of 2.5.

In summary, there looks to me to be very little to choose between WPP and BSkyB. On P/E and dividend, the overall picture is of two companies on ratings at or inferior to the market average, but with above-average records of earnings and dividend growth. Thus, WPP and BSkyB appear fairly valued at present rather than cheap.

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