I’ve been a fan of WPP (LSE: WPP) for a long time, mainly as a provider of dividend income. But in recent years it’s had a tough time. It’s been in decline since before founder Martin Sorrell left the FTSE 100 marketing group in controversial circumstances in 2018. Since then the slide has continued, and the Covid-19 crash gave the shares an extra kicking.
The WPP share price has fallen 39% so far in 2020, and it’s down 52% over the past five years. The previously dependable dividend was slashed too, in 2019. But analysts are expecting earnings to start picking up again from 2021. And I’m seeing the potential for a renewed progressive phase for the firm’s rebased dividend.
Share price boost
WPP shares picked up 5% Thursday morning, on the back of the company’s first-half results. They are still way below the FTSE 100’s 20% year-to-date drop, but they’re closing the gap.
The company reported a pre-tax loss of £2.5bn, after revenue fell 12.3%. That came as no shock, and WPP did record a headline operating profit of £382m.
What did surprise the market was the reinstatement of the firm’s dividend, after the 2019 final payout was cancelled. The interim dividend, set at 10p per share, suggests a full-year yield of 3% on the current share price. And we could even see better than that. The company told us its “performance in the second quarter was much better than initially anticipated“, and added that “the flexibility of our business model is delivering the £700–800 million of cost savings targeted.“
It’s looking to me like the start of a turnaround that other FTSE 100 strugglers can do nothing but envy.
Improved balance sheet
The biggest boost to WPP’s finances came from the sale of Kantar. The proceeds enabled the firm to get its average net debt down to £2.5bn, from £4.5bn in the prior period. It meant the company had cash of £2.5bn on the books at 30 June, and total liquidity (including undrawn facilities) of £4.7bn.
WPP is still carrying a net debt to EBITDA ratio of 2.1 times, but it aims to get that multiple down between 1.5 and 1.75 times by the end of 2021. I think the announcement of the dividend is a sign of the firm’s confidence in hitting that target.
I can’t help wondering if WPP would have been prepared to pursue such an aggressive reshaping had Martin Sorrell still been in charge. For the move to a slimmed down company in today’s environment to succeed, I think the change of management has turned out positive.
FTSE 100 dividends
These days, I’ll hold off considering an investment in a recovery stock until I see real signs of that recovery. And even though WPP still has some way to go on the profit front, I see this as such a sign.
We’ll know more on the income front later, being told: “The Board has also decided to review our ongoing dividend policy, in the context of our overall capital allocation priorities. We intend to update investors on our plans as part of a wider capital markets event towards the end of 2020“.
Looking for FTSE 100 income, I’d be happy to buy WPP shares now.