Are these FTSE 100 stocks a buy after 20%+ dividend increase?

Why have these two FTSE 100 (INDEXFTSE: UKX) firms suddenly ramped up their dividends?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You usually expect big cap stocks to deliver slow but steady dividend growth. So when two FTSE 100 members announced 20%-plus dividend increases on Friday morning, it caught my attention.

Are these big hikes a buy signal for income investors, or are these firms trying to distract shareholders from bad news elsewhere?

Record revenues in 2016

Advertising giant WPP (LSE: WPP) had a good year in 2016. Revenue rose by 17.6% to £14,389m. That’s a 7.2% real-terms increase, excluding exchange rate effects. Adjusted pre-tax profit rose by 22.4% to £1,986m, up 9.1% on a constant currency basis.

Like-for-like sales, a key performance measure which strips out the impact of WPP’s regular acquisitions, were 3.1% higher.

WPP’s adjusted earnings per share of 113.2p were in line with forecasts, and the firm had already announced plans to increase its dividend payout ratio to 50% of earnings. So the 26% dividend increase to 56.6p per share wasn’t a huge surprise.

What’s going wrong?

But WPP’s record 2016 results were  not enough to stop the firm’s shares falling by 6% on Friday morning. The problem is that investors pay a lot of attention to the outlook statement provided by chief executive Sir Martin Sorrell. And according to Sir Martin, the outlook isn’t great.

Post-Brexit prospects in the UK are “mixed”, while growth opportunities for the firm’s clients were described as “challenging”. Growth is expected to remain low this year, in line with the last few years.

Is WPP a buy?

Martin Sorrell has been sounding a cautious note for several years. But WPP’s results have remained solid. I’m tempted to view today’s sell-off as a round of profit taking, after a year in which the shares gained nearly 25%.

WPP stock now trades on a 2017 forecast P/E of about 14, with a prospective yield of 3.5%. I’ll continue to hold, and may consider adding more to my position.

Failure to merge

The proposed merger deal between London Stock Exchange Group (LSE: LSE) and Deutsche Börse is expected to fail due to LSE’s inability to meet all of the EU regulator’s demands.

In LSE’s full-year results on Friday, the group said it would continue working on the deal until EU regulators make a formal decision in a month’s time. But the merger is not expected to complete.

The good news is that LSE’s business is trading well without Deutsche Börse. Total income rose by 17% to £1,657.1m in 2016. But operating profit was only 6% higher at £426.8m. This implies that the group’s operating profit margin fell from 28.5% to 25.8% last year. That’s disappointing, but not a problem. LSE’s margins have always been variable from year to year.

The surprise news was that the dividend will be increased by 20% to 43.2p per share. LSE says that this reflects “the strong outlook for the group”. But I suspect it’s an attempt to compensate shareholders for the likely loss of the merger.

Today’s results leave LSE trading on a P/E of 25 with a dividend yield of 1.4%. Further growth is expected in 2017, but in my opinion most of the upside is already in the price. I’d hold, or perhaps take profits and invest in a new opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of WPP. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s why I think the Vodafone share price should be 110% higher

Reflecting on speculation, our writer believes there’s a case to be made for the Vodafone share price being more than…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Is this dividend star also the best bargain in the FTSE 100?

This FTSE 100 stock pays a whopping 8%+ yield, looks very undervalued against its peers, and is set for stellar…

Read more »

Investing Articles

2 FTSE 100 stocks. One sublime, the other ridiculous

Our writer doesn’t understand the appeal of Ocado. But looking at the grocer’s latest results makes him see the attraction…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Down 18% in a year, what’s next for the Greatland Gold (GGP) share price?

The Greatland Gold share price has disappointed over the past 12 months. Our writer asks whether the company’s latest update…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

With 30% annual returns for a decade, I’m buying this for my Stocks & Shares ISA

Oliver Rodzianko has been looking for a new investment for his Stocks and Shares ISA. Here's one he's decided is…

Read more »

Investing Articles

These were the FTSE 100’s dogs and stars in February

The FTSE 100 limped along last month, but some Footsie shares soared while others slumped. Here are February's winners and…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

This £43bn of passive income is up for grabs today!

As a lover of passive income, I'm always on the lookout for extra cash. The good news is that these…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Is this my once-in-a-decade chance to buy these 2 beaten-down UK shares before they rocket?

The FTSE 100 has had a bumpy ride but these two UK shares have had it bumpier. Could now be…

Read more »