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This share price has fallen 50%. I’m buying and here’s why

Nearly all shares have been hit in the recent market crash. Some though have as ever been hit harder than others. One such company is global advertising and marketing group WPP (LSE: WPP).

The shares

The WPP share price has fallen by over 50% in just the last month. It means the shares now have a P/E of 8 and a dividend yield of over 10%. This is a seemingly very attractive combination of a low-value share and a high income.

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However, WPP has fallen worse than many other companies in the current bear market because it’s got other problems on its hands. For its latest full year, pre-tax profits fell to £982m from £1.2bn. Revenue slipped 0.3% to £10.8bn. Operating profits from continuing operations fell 5.6% to £1.6bn.

Coronavirus, if it causes a global recession, is likely to hit advertising particularly hard. Advertising is one of those corporate budgets that companies cut when economic conditions toughen. It seems highly likely that’s exactly what’s going to happen in the short term.

Another challenge WPP faces is the dominance of Facebook and Google when it comes to digital marketing. As brands move spend online and away from traditional advertising there’s the possibility it may squeeze opportunities at some of WPP’s agencies.

Reasons for optimism

The advertising holding company clearly faces some financial and operational challenges. This explains why the share price has slumped so rapidly. Though it’s not all bad and investors may see value in the shares, especially now.

In the UK and ‘rest of the world’ (which includes Asia) the business is still growing, albeit at a low level. The regions saw 0.3% and 1.4% revenue growth respectively. 

The sale of its Kantar operation means debt can be reduced, from £4bn down to £1.5bn, while £950m will be returned to shareholders through a buyback.

The business under Mark Read has slimmed down a lot after rapid acquisition-led growth under Sir Martin Sorrell. Some 50 agencies have gone in the last 18 months. The business is now using data and technology to offer new services to clients, for example helping them succeed on online marketplaces like Amazon and Alibaba.

The dividend has been held flat for a couple of years, allowing management to avoid a cut thus far, and dividend cover is still relatively healthy at over 1.3x.

Taken together, I am confident with my recent purchase of WPP shares and would be tempted to pick up more once it becomes clearer that the market is recovering from its current coronavirus-induced panic.

I know the group faces a number of hurdles, but overall, it’s a business with good margins, reducing debt and a very healthy dividend. The potential for a turnaround to drive significant value for shareholders is also appealing. The ad world is changing, but so is WPP.

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Andy Ross owns shares in WPP. 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.