Shares of global advertising behemoth WPP (LSE: WPP) hit a new multi-year low yesterday ahead of a Q3 trading update today. The update sent the shares lower still early this morning but they’ve recovered to 1,325p, as I’m writing, over 2% up on yesterday’s close.
A credible thesis
The FTSE 100 group reported a continuation of a softening trend in quarterly like-for-like revenues. Following on from a Q1 increase of 0.2% and a Q2 contraction of 0.8%, the company said it saw a 2% decline in Q3, with particular weakness in the large North American market.
WPP presented a credible thesis that a shift to cost reduction and zero-based budgeting among many clients has produced one-time reductions in marketing spend, which will be increasingly difficult to repeat. Indeed, WPP noted that many are already talking about increasing spend again as volume growth has been reduced. However, it said that should the softening of marketing investment persist in 2018, the Winter Olympics, FIFA World Cup and US mid-term Congressional elections might well counter it.
For the longer term, the company reiterated its target of “annual headline diluted EPS growth of 10% to 15% p.a. delivered through revenue growth, margin expansion, acquisitions and share buybacks.”
Set for rising dividends
At the current depressed share price, WPP’s 12-month forward price-to-earnings (P/E) ratio is just 10.4, which is historically low for the company, while a prospective dividend yield of 4.8% (covered a healthy two times by forecast earnings) is as high as I can ever remember it being. Even if WPP were to fall somewhat short of its targeted 10% to 15% annual EPS growth, it could still support the delivery of very handsome dividend increases on that high starting yield of 4.8%.
A dividend in the doldrums
I’m less enamoured of fellow high-yielding Footsie stock Marks & Spencer (LSE: MKS). For its last financial year to 1 April, the company maintained its dividend at the same 18.7p level as the previous year, with coverage by EPS falling to 1.6 from 1.9 after a 13% earnings drop. At a current share price of 347p, this gives a yield of 5.4%.
However, with another double-digit fall in EPS forecast for the current year, some City analysts are now predicting a dividend cut. This shows up in a consensus forecast payout of 18.1p. The consensus is made up of analysts expecting the dividend to be maintained at 18.7p and those expecting a cut much deeper than 18.1p.
M&S has cut its dividend twice so far since the turn of the millennium, once by 37.5% and once by 33.3%. On both occasions — but under different chief executives — the company justified the dividend cut on the basis of the need to invest in a transformation plan to put the business on a path to sustainable long-term growth and shareholder returns.
It seems to be a perennial state for M&S. Yet another chief executive is currently embarking on yet another transformation plan. Due to the company’s serial failure to deliver sustainable returns for investors, I rate the stock a ‘sell’.
