WPP has continued the strong momentum seen in the first quarter. Net sales grew by 4.7% in the first half at constant currency. On a like-for-like basis, which excludes the impact of acquisitions, net sales were up 2.3%. Headline profit before tax and diluted earnings per share grew by 7.9% to £669 million and by 15.2% to 33.5p, respectively. The interim dividend rises by 36.9% to 15.91p, in line with the group's recently announced target of increasing the dividend pay-out ratio to 50% within two years (FY14: 45%). The shares were around 2% lower in early morning trading, broadly in line with the wider market.
WPP is the largest media agency in the world, with 188,000 employees in a group of businesses spanning everything from creative campaigns to media buying and market research.
Advertising is a cyclical industry but at the moment conditions in most of WPP's markets are good. The company has done an excellent job of controlling costs which has seen margins progressively expand over recent years. This has translated into very strong cash flows, enabling organic growth to be supplemented by acquisitions. In recent years, deal-making has been focused on raising exposure to digital media and faster growing nations, with a target for 40-45% of sales to be earned from each of these categories within five years.
Over the last twenty years WPP has grown the dividend at a double-digit compound annual growth rate. The latest hike in the interim payment, almost 40%, is something of a one-off, as the group is raising its payout ratio over the next year or so. WPP aim to achieve an average earnings growth rate of 10-15%, through a combination of organic growth, acquisitions and earnings-enhancing share buy-backs. If they can achieve this prospects for future dividends could be attractive.
As long as the global economy behaves itself, WPP should be capable of strong growth, although the shares are likely to remain volatile while concerns over China persist. The price to earnings ratio (P/E) has fallen from over 16x at the start of the year to around 13.4x, slightly above the long run average. The prospective yield for this year is 3.2%, rising to 4.0% by FY17, on current analyst forecasts, but remember dividends are variable and not guaranteed.
Regional and sector review (Like-for-like net sales basis):
Sales growth, outside of North America and Western Europe, slowed from +4.0% in Q1 to +0.7% in Q2, as China and Russia, in particular, came under pressure. Growth also slowed in the UK from +3.6% in Q1 to +2.2% in Q2. Growth picked up in Western Continental Europe from +0.3% in Q1 to +2% in Q2, and in North America (+3.5% in Q2, +2.1% in Q1).
Data Investment Management was the weakest performing sector with sales broadly flat in the first half and down 1% in Q2. All other sectors grew, with advertising and media investment management achieving the strongest growth (+3.2% in H1).
WPP continued to trade strongly in July (net sales +3.7%) and has maintained its full year guidance for:
- Like-for-like revenue and net sales growth of over 3%, with a stronger second half expected, partly as a result of easier comparatives.
- Net sales margin improvement of 0.3 margin points excluding the impact of currency.
Over the long term the group continues to target headline diluted earnings per share growth of 10% to 15% per annum delivered through revenue growth, margin expansion, acquisitions and share buy-backs.
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