WPP (LSE: WPP) fell out of favour with investors when founder and CEO Sir Martin Sorrell left the company. And after a steady slide over the past few years, nothing much seems to have changed.
But I’m seriously wondering if it could be one of the most attractive UK shares to buy at the moment.
Even before Covid, WPP shares had been on a slide. But even though we started to see a recovery as the pandemic began to recede, that soon turned back down in 2022. Still, in the weeks leading up to first-half results, investors have been pushing the price back up.
Those results included an improvement in WPP’s guidance, together with an increased interim dividend. For the first half, the company is paying 15p per share, 20% more than in 2021.
Buybacks
In addition, WPP completed £637m in share buybacks in the first half, and expects to total £800m in 2022. Share buybacks since June 2021 have reached £1.1bn.
There seems to be plenty of spare capital to hand back to shareholders. But a couple of aspects of WPP’s cash situation concern me. One is that working cash outflow reached £232m year-on-year, though it’s expected to be pretty much flat by the end of the year.
Debt
My other worry is that net debt is rising, up £1.6bn year-on-year to £3.1bn. Is it wise to be returning large amounts of cash to shareholders while allowing debt to rise so sharply? It’s the equivalent of borrowing money to give to shareholders. Really.
Still, the company expects to record £300m in annual savings this year compared to 2019. And if its judgment is good that its shares are cheap enough to buy back at current prices, it could be to the long-term benefit of shareholders.
Growth
We saw an 8.9% rise in like-for-like revenue (less pass-through costs) in the half. That’s 9.4% up on 2019 too. So it looks like WPP is getting back to progress on the transformation plan that was interrupted by the pandemic.
At the bottom line, headline operating profit gained 8.2%, with diluted earnings per share up 15%. If repeated in H2, we’d be looking at a P/E of around 13, based on the current share price.
Share price
The share price dropped 6% in early trading in response to these results. I suspect the market might be a little troubled by the rising debt situation and first-half cash squeeze.
It’s come at a time when the Bank of England has warned us we face a fairly long recession with inflation heading well into double digits. I fear WPP could suffer a tougher second half than it expected when its scribes put together this interim report.
I suspect the WPP share price still has heavy weather ahead of it, and I don’t expect any great progress in the coming months. But looking further ahead, I see a well-managed company that’s a leader in its field. And I reckon WPP could be a top buy for long-term investors.
