As the end of 2022 gets closer, I’ve started to think about the changes I want to make to my portfolio. It certainly hasn’t been the easiest year in which to invest and most of my favourite sectors have struggled. Going forward, I’m keen to move away from the growth sector as many of these stocks have fallen significantly. I’m also not massively fond of the value sector, given that companies with lower price-to-earnings (P/E) levels haven’t escaped the sell-offs. Therefore, I’m keen to look for several new income opportunities in the year ahead.
My selection process
Given my dividend focus, I often use a simple filter to find companies in the FTSE 100 that may be of interest. This involves looking for shares that have paid a dividend consistently for at least 10 years. I also want this dividend to be forecast to grow by at least 10% next year. Additionally the dividend needs to be covered at least 1.5 times by earnings per share (EPS). Finally, I look for companies offering a minimum yield of 3%. Although this isn’t extremely high, if the yield grows, I consider this a fair dividend in the current environment.
Dividend Characteristics
That brings me to WPP Group (LSE: WPP), the world’s largest advertising agency, which meets all of my criteria. The share price has been quite volatile over the last few years, rising by almost 40% in 2021 before falling 28% in 2022. This fall has resulted in a P/E ratio of just 10.3, which is below the index average of 15. However, the dividend characteristics, rather than the price, drew my attention to this share.
It currently has a dividend yield of 3.9%, which is forecast to grow by 22.3% next year, reaching 4.7% in 2023. A dividend has been paid consistently for 19 years and has grown for the last two. It’s also reasonably safe from a payment perspective, with dividend cover of 2.5 times. This indicates that EPS can comfortably cover the current and forecast yield.
Fundamentals and weaknesses
Unsurprisingly, many of the company’s fundamentals are also attractive, with fair profit margins and reasonable return on capital employed (ROCE). And free cash generation is strong, while earnings forecasts are impressive, with EPS expected to grow by 20.6% next year. These characteristics are additionally encouraging given the price multiple mentioned previously. Due to the significant fall in 2022, the stock is trading at a discount compared to the last few years.
However, there are some less positive signs, such as debt, which is relatively high at over 78% of market capitalisation. Also, the forecast earnings increases are coming on the back of a lower level achieved in 2021. This is due to earnings falling considerably in 2020. Despite a strong recovery in 2021, it’s still below pre-pandemic numbers.
Nonetheless, I think the share price fall in 2022 has produced an excellent income opportunity for my portfolio. The company combines strong fundamentals with a growing dividend, so I’d like to add it to my 2023 portfolio at the end of the year.
