Should You Buy WPP Today?


LONDON -- Advertising and public relations firm WPP has enjoyed a stratospheric share-price run recently, leaping almost 35% in just over four months.

I am convinced that the stock should continue to enjoy further strong momentum as revenues continue to head higher, boosted by the likelihood of fresh M&A activity, while a progressive dividend sweetens the investment case.

Revenues head higher despite wider macro woes
WPP saw revenues increase 3.5% to 10.4 billion pounds last year, the company reported last month, driving pre-tax profit 8% higher to 1.1 billion pounds. The firm expects the industry environment to remain equally challenging in 2013, although advertising revenues are expected to grow in 2014 as a number of large events, such as the World Cup, are staged.

As well, restructuring work should continue to deliver meaty savings improvements. Operating margins rose 50 basis points in 2012, to 14.8%, with margins in advertising and media leaping an impressive 160 basis points. The company has a long-term margin target of 18.3%, suggesting improvement measures have much further to run.

Elsewhere, WPP is planning to plough between 200 and 300 million pounds into acquisition activity per year to supplement organic growth. And the company announced investment in U.S.-based music event specialist SFX Entertainment yesterday, giving WPP exposure to around 100 million music enthusiasts through its stable of festivals, shows, clubs, and online music brands.

City analysts expect earnings per share to rise 4% in 2013, to 81 pence, and advance a further 9% next year to 88 pence. WPP currently trades on a P/E ratio of 13.4 for 2012, compared with the equivalent forward projection of 13.7 for the wider media sector. WPP's rating is anticipated to fall to 12.2 in 2014.

Plump shareholder payouts expected to accelerate
The advertising specialist has remained committed to maintaining decent shareholder payouts in recent years, even in times of earnings pressure. WPP kept dividends on hold at 15.5p per share in 2009 even as earnings per share fell 20%.

Following the 16% annual dividend hike recorded last year, to 28.5 pence per share, broker estimates expect the payout to rise to 32.3 pence per share and 36.7 pence per share for 2013 and 2014 respectively. Although yields of 3% and 3.4% for these years are below the 3.5% FTSE 100 average, I believe the firm's juicy dividend policy should send yields comfortably north of this threshold in coming years.

As well, dividends for the next two years are protected with coverage of about 2.4 times, healthily above a reading of 2, which is broadly considered to be safe territory.

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Royston does not own shares in WPP. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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