With a double-digit dividend yield, WPP (LSE:WPP) shares are starting to get more attention from opportunistic income investors.
Following a pretty disastrous 2025 where the media giant’s market-cap was slashed by more than half, investors are now presented with an ex-FTSE 100 stock trading at a 52-week low, a price-to-earnings ratio of just 7.7, and a staggering yield of 11.9%. What happened? And is this yield too good to be true?
AI disruption
The downfall of WPP has been driven by a combination of factors. However, one of the most prominent has been generative artificial intelligence (AI).
Using AI tools, companies are increasingly able to generate ads in-house at virtually zero cost. And consequently, a lot of WPP’s core services have been made largely redundant. This fear isn’t just investor speculation.
The number of prospective businesses looking to hire WPP have dropped sharply. And at the same time, several existing high-profile clients such as Coca-Cola and Paramount have ended their long-time relationships with the marketing enterprise.
The consequence has been an acceleration of revenue and cash flow declines, culminating in a change of leadership and profit warnings.
Needless to say, that’s bad news for dividends, drastically increasing the probability of a payout cut. In fact, that’s already happened. The stock’s interim dividend has already been slashed in half, from 15p to 7.5p. And looking at the latest analyst forecasts, the full-year dividend’s expected to drop from 39.4p to 24.3p.
In other words, WPP seems to be a classic yield trap… or is it?
Hidden recovery potential
Assuming the forecast is accurate, that puts WPP’s true dividend yield closer to 9.1% – a still pretty significant income opportunity for investors. And with the stock price falling so sharply, there’s a growing consensus that investors may have overreacted.
Rather than letting AI continue to disrupt the business, new CEO Cindy Rose has embraced the technology. And the firm has since created its own generative platform – WPP Open Pro – which launched in October.
Beyond pivoting the business towards a software subscription model, Rose is also executing a wider restructuring to simplify operations and introduce more disciplined cost controls. If successful, the group could soon see profit margins stabilise and cash flows restored, enabling the rebased dividend to be sustained.
What’s the verdict?
Overall, the new strategic direction seems prudent, particularly as AI disruption seems to be structural rather than cyclical.
However, seamlessly transitioning from a service-based revenue model to a subscription-based one is no easy task. And even if execution is flawless, dividends could still come under significant pressure due to a chunky pile of outstanding debts, limiting management’s financial flexibility versus rivals.
Put simply, the company has a lot to prove. And with Rose’s turnaround strategy only recently starting to get underway, investing in WPP shares today comes with significant risk. That’s why I’m not tempted to add this business to my ISA right now.
Instead, I’ve got my eye on other promising passive income opportunities.
