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Smart Investor: how has WPP performed?
Almost a year ago Smart Investor tipped WPP as 'an attractive prospect’. How has it fared since then, and is now the time to buy, hold or sell?
When investing, I always try to detach myself from the personalities of the people who run a company and from my own interest in the work a company performs.
For instance, I have always been uninterested in PR, branding and marketing, so if I were investing based only on what I find exciting I would certainly not buy a slice of a marketing company.
Furthermore, I find many chief executives to be rather uninspiring and unappealing. However, this matters not, and my only requirement is that they perform their job adequately. This emotional detachment has served me well over the years, with an objective approach to apportioning capital being a major weapon in any investors’ arsenal.
Still an 'attractive prospect'?
The above brings me neatly on to WPP, a company that was the subject of an article I wrote on 2 August 2011. At the end of the article, I stated that ‘WPP is an attractive prospect’. So, how has it fared over the intervening period?
At the time of writing the previous article, WPP was trading at £7.09 and the FTSE 100 was at around 5,800. Currently, WPP‘s shares are selling for £7.93 each, a gain of 11.9%, while the FTSE 100 has dropped to 5,660, a fall of 2.4%.
Of course, as was the theme of last year’s article, WPP paid a mean dividend of 3.5% (the second dividend included in this figure will be paid on 9 July), which gives a total return of 15.4%. Meanwhile, when the FTSE 100’s yield of roughly 3.5% is added to its negative capital return, its total return is 1.1%.
Buy, sell or hold?
So, WPP has outperformed the FTSE 100, but is it now a buy, sell or a hold?
Last year proved to be a record year for WPP, with net profit increasing from £586 million to £840 million. This equates to a return on equity (ROE) of 12.6%, which is an improvement on 2010’s 9%+. ROE is an area in which WPP needs to continue to improve as 12.6% is still only reasonable, especially when the company is carrying at least a moderate amount of debt.
On the topic of debt, financial gearing has increased to a still acceptable 66.2% from 60% last year. This increase will have aided ROE, and interest cover remains ample at 4.7. In addition, free cash flow is still strong and averages £736 million over the past five years versus average net profit of £553 million over the same period.
As mentioned in the previous article, WPP’s dividend payout ratio was disappointing last year. The story was the same the previous year, with the payout ratio being maintained at just 38%. Of course, a jump of 40% in net profit means that dividends per share are have increased by 38%, although a higher share price keeps the yield down to 3.1%.
In terms of value, WPP is considerably cheaper than it was on 2 August 2011. The price-to-earnings ratio has fallen substantially from 15.5 to 12.3, and the price to book ratio is still 1.5.
Therefore, with its finances still in check, its performance better than last year and its value more appealing, WPP is now a more attractive prospect than it was 11 months ago.
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