I always like it when a company thinks its own shares are so undervalued it wants to buy them back. That’s what’s happened with WPP (LSE: WPP), on interim results day. And the WPP share price gained 3% in early trading as a result.
It helps when it’s a company I’ve long admired too. Still, WPP has been a bit out of favour since the controversial departure of founder Sir Martin Sorrell.
Chief executive Mark Read said “The like-for-like revenue less pass-through costs growth rate of 19.3% in the second quarter is our highest on record, as clients reinvest in marketing, particularly in digital media, ecommerce and marketing technology. We have returned to 2019 levels in 2021, a year ahead of our plan, with good momentum into 2022.”
Share buyback
As a result, WPP is now in a position to build on its first-half share buyback of £250m. The new plan involves a further £350m buyback in H2. It’s perhaps not a large amount for a company with a market cap of more than £11bn. But I do see it as an indication of the board’s confidence.
That confidence is also reflected in WPP’s interim dividend, which it lifted by 25% to 12.5p per share. Now, I’m always cautious when I see companies keen to boost their shareholder returns coming out of a tough patch. I just don’t like to see it happen when debts are still substantial — that seems like too much focus on the short term, which could lay down problems for the longer term.
No debt problems
But WPP has no such issues. Net debt at 30 June stood at £1.5bn, down £1.2bn year-on-year. The company says that’s “reflecting good working capital management,” and I would find it hard to disagree. There wasn’t a huge amount of debt on the books even at the halfway point in pandemic crash year. And getting it down even lower helps relieve future possible pressure on the WPP share price.
At this point in 2021, the balance sheet is of most importance to me. But revenue and profits are progressing too. WPP reported a 9.8% rise in revenue, with a 16% like-for-like gain. Reported operating profit came in 54% higher, with operating margin improving by 3.9 percentage points to 12.1%.
But is WPP really among the best FTSE 100 stocks right now? Well, I do think there are some better recovery bargains out there, at least for those looking for shorter-term gains.
WPP share price valuation
And I reckon WPP still has more work to do in its transformation. After all, the share price is still down 45% over the past five years. I don’t think the big institutional investors yet have the same confidence in the current management team that they had in Sir Martin in the early days.
I think the current valuation reflects that. H1 earnings, annualised, would suggest a P/E of around 16-17 on the current WPP share price. I don’t think that’s super cheap, but also not too demanding. Yes, I have WPP on my list of best FTSE 100 stock candidates for my next investment.
