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Is this FTSE 100 stock’s 7.5% dividend yield at risk?

The share price of FTSE100 media giant WPP (LSE: WPP) has more than halved over the last couple of years. Meanwhile, that of small-cap sector peer XLMedia (LSE: XLM), which released its latest annual results this morning, has declined almost 75% in little more than 12 months.

Both companies are in the process of repositioning and restructuring their businesses. In this article, I will discuss the outlook for their earnings and dividends, and give my view on whether they have investment appeal at their current valuations.

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Litany of issues

XLMedia’s publishing and media operations are largely linked to gambling. In September, when I wrote about its half-year results, there was a staggering litany of issues that had impacted performance. Many of these were related to regulation, but others included attacks on its websites and technical problems.

The share price was 103p at the time, and I didn’t think the valuation of 10 times forecast earnings was cheap enough, due to the multiple issues and uncertainties. Today, the price is 59p, as I’m writing (up over 5% on the day), following this morning’s full-year results release.

The company posted a 9% fall in adjusted earnings per share (EPS) to $0.13 (9.85p at current exchange rates), which means the shares are now trading at just six times earnings. The board reduced the dividend in line with the fall in EPS. Nevertheless, the payout of $0.7 (5.3p) gives a whopping yield of 9%.

On surer ground

Many of the issues the company reported at the half-year stage have receded. It’s also well into a radical business shift to cease low-margin media activities, and concentrate on growing its higher-margin publishing division. The focus is on regulated markets across the gambling sector, and a promising nascent personal finance business.

The company appears to me to be on surer ground now. And with the prospect of higher-quality sustainable earnings growth, and over $40m cash on the balance sheet, the dividend also looks pretty secure to my eye. I think the stock is now cheap enough to rate it a ‘buy’.

Negative developments

WPP is another stock I was bearish on last year. This was due to three negative developments. Near-term earnings downgrades, a reduction in the company’s long-term EPS growth target to 5%-10% a year (from 10%-15%), and the departure of founder and driving force Sir Martin Sorrell.

At the time I was writing, the shares were trading at 1,250p. This represented 10.5 times forecast earnings and a prospective dividend yield of 4.8%. I didn’t think this valuation was sufficiently attractive, weighed against the negative developments.

Return to growth

Today, we’re looking at a share price of little more than 800p, and 7.9 times forecast earnings of 102p, with a prospective dividend yield of 7.5% on a 60p dividend. I’ve been impressed by new chief executive Mark Read, and his three-year plan of “radical evolution” for growth. He’s lost no time in beginning to streamline the group, and has already strengthened the balance sheet through disposals of non-core businesses.

Following last year’s 10% fall in EPS, City analysts are projecting a further 7% decline this year, before a return to growth in 2020. On this outlook, I believe the dividend should be safe. The high yield and low earnings multiple offer a margin of safety, and I rate the stock a ‘buy’.

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G A Chester 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.