One of my favourite techniques for building a long-term portfolio is to buy unloved big-cap dividend stocks. The main attraction of this approach is that it often enables me to lock in unusually high dividend yields, without much risk of financial distress.
Today I want to look at a FTSE 100 stock that’s offering its highest dividend yield for at least five years. I’m also going to consider a smaller stock in the same sector with the potential to deliver attractive capital gains.
A change could be good
The departure of former WPP (LSE: WPP) chief executive Sir Martin Sorrell in April shocked markets and accelerated the slump in the advertising giant’s share price. But while key man risk can be a real concern for investors, in this case I think Sir Martin’s departure could be good news.
From what I’ve read about WPP, it seems likely to me that the large and fragmented conglomerate created by Sir Martin contains areas of overlap and inefficiency. Reducing these — perhaps through selective disposals — could help to create a more mature and durable long-term business.
Regardless of this, trading appears to be fairly stable at the moment. Revenue rose by 2.7% to $6.6bn during the first four months of the year, excluding exchange rate headwinds. And although earnings forecasts have fallen by about 12% over the last year, the decline now seems to have slowed. City projections for earnings of around 117p per share in 2018 have been largely unchanged for the last couple of months.
Real value for investors?
This is a large, complex business, made up of many individual advertising, marketing and PR firms. But I can see value emerging from this conglomerate. One of my preferred measures of valuation is earnings yield. This compares operating profit with the enterprise value (market cap + net debt) of a business.
Earnings yield gives us an idea of the profits available to the owner of a company before tax and interest payments. WPP’s earnings yield is now 9.5%, which I view as attractively high.
The shares also look cheap on more conventional metrics, with a forecast P/E of 10.5 and a prospective yield of 4.8%. In my view, WPP makes sense as a long-term income buy.
What about growth?
Investors looking for a genuine growth stock might want to look elsewhere. One possibility in the marketing sector is St Ives (LSE: SIV). This £150m marketing services company said today that profits for the year ended 28 July are “expected to be at the upper end of market expectations”.
This improvement is largely down to the growth in digital marketing, which contributed to like-for-like revenue growth of 12%, excluding currency headwinds.
My only real concern is that like-for-like revenue growth slowed to just 1% during the second half of the year. The company says this is down to a strong comparative period last year, plus slower trading in the healthcare sector and the group’s data business.
Customer sentiment is now said to be improving. Earnings are expected to rise by about 7% in 2018/19. This puts St Ives stock on a forecast P/E of 9, with a potential dividend yield of 2.1%.
A new chief executive has just joined the firm, so we could see a renewed focus on growth. For investors who understand this sector, I think this small-cap could be worth a closer look.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.