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7 Reasons I Just Bought WPP's High Yield Stock

By Reuben Gregg Brewer - Nov 10, 2019 at 12:29PM

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WPP is out of favor in an out of favor industry -- add in a high yield and some big corporate decisions and I'm all in.

Based in Great Britain, WPP plc ( WPP 1.43% ) is one of the world's largest advertising agencies. It currently has a dividend yield of roughly 6.1%. I had been watching the stock for more than a year before I decided it was time to buy. Here's what got WPP on my radar screen, and what I saw that finally made me pull the trigger.

1. Anything but love at first sight

I would be lying if I didn't admit that WPP first caught my attention because of its high yield. That was more than a year ago, and the yield was over 7% at the time. It was also trading with a negative Graham number, which is a shorthand valuation tool created by value investing legend Benjamin Graham (the man who helped train Warren Buffett). So WPP was offering a high yield and looked like it was trading at a cheap price -- not surprising given that the stock was nearly 60% below the highs it had achieved in 2015. I have a value bias, and I'm a dyed-in-the-wool dividend investor, so I decided to dig in. 

A street sign that reads where to invest

Image source: Getty Images

The truth is, a year or so ago, I didn't like what I saw. The advertising industry was out of favor, WPP had a tad more leverage than I like to see, and it was going through an ugly management shakeup. The risk of WPP going belly-up seemed pretty slim, but the uncertainty around how the company would progress from that point in time seemed quite hard to resolve. And a dividend cut was a legitimate possibility. It just wasn't for me, and I chose to move on. But the name and story stuck in the back of my mind.

2. An existential moment

Perhaps existential is a bit of hyperbole, but the departure of the company's founder, Martin Sorrell, was an important moment in WPP's history. That's basically what was going on when I first looked at the name, and one of the main reasons I decided not to buy. WPP was created through a series of mergers over several decades that turned Sorrell into an industry rock star. He was hard-driving, and appears to have become more enamored of being a rock star than being the CEO of WPP. Two notable things that bothered me were that the company had lost some important clients, and it didn't seem to be doing enough about the shift it was seeing in ad spending because of the internet. And those problems went to the top.

With Sorrell out, the company put two people in charge while it looked for a full-time replacement. After a search, which included internal and external candidates, the board decided on Mark Read. He was one of the two men asked to steer the ship while the CEO search was taking place. Everything I've read about Read is that he is a low-key CEO who lets his team do their job, trusting that they will put their best effort into whatever they are doing. Over the past year he has worked to shift the culture to one that is more inclusive and congenial. In other words, he was almost the exact opposite of Sorrell.

When facing a pivotal juncture, the company decided it wanted to be something different than it was, with an eye to a sustainable business and culture. And it took steps to make that happen, including changing its CEO and the leadership at many of its advertising agencies, and adding people to the team to help change the way the company operated. 

3. What about that debt load?

So the culture appeared to be moving in a good direction, but that wasn't the only change the Read was working on. He also started to sell assets in an attempt to pay down debt. Over the past year the company was able to reduce its net debt by roughly 10%. That's nice, but only amounted to around half a million pounds. More recently it agreed to sell 60% of its data-focused Kantar division to Bain Capital for $3.1 billion. A significant portion of that is going to be put toward debt reduction, with the rest earmarked to be "returned" to investors. That likely means stock buybacks, which will help offset the hit to the top line from the sale. 

So WPP is taking a fairly aggressive stance on debt reduction. But, importantly, with a 40% stake in Kantar it will continue to benefit from the services this division provided. And if things go well it will benefit financially from Kantar as well. The move also allows WPP to focus on its creative businesses rather than on data.

4. Advertising isn't going away, but it has to change

Focusing on being creative is vital for WPP, because advertising is all about creativity. That's the company's strong suit and, in my mind, what will keep it (and all advertising firms) relevant as ad spending shifts toward digital platforms. Right now digital advertising is still rather young, and there is a lot of testing going on. But you can't simply put up any old ad and expect the world to react, you need to create something alluring. WPP does that well, and is refocusing on this core competency. 

WPP Chart

WPP data by YCharts

However, that doesn't mean WPP doesn't have to change. That's why Read has merged a number of its key agencies, with the goal of getting its creative side more in touch with its digital side. And he has been bringing agencies together in centralized locations (or hubs) so they can work together more easily on key projects. I'm not an advertising expert, but this seems like a good enough plan to me as the company works to adjust to the changes being created by the growth of the internet. And, at last, the company is actually doing something notable here. 

5. Winning new business

Of course WPP could make all sorts of changes and still not succeed. And, truth be told, the next year or so is likely to be difficult. But there are early signs of progress, including a list of notable new business wins that dwarfs the losses the company has experienced. Advertising is a business where client turnover is normal. The goal is to win more than you lose, and over the past year WPP has managed to do just that. This was one of the key signs that suggested to me that this advertising giant was starting to move in the right direction.

6. Results start to show progress

WPP got hit hard by client losses just prior to the departure of its founder, and it is still working to get back on track. As I noted above, the next year will likely continue to be difficult. But it is making progress, which is, importantly, starting to show up in its financial results. Things will ebb and flow over time, of course, but revenue (minus costs that get passed through to clients) has been improving. Performance is still negative in some key areas, notably the U.S., but WPP's performance has been trending toward "less bad" over the past year. Once again, a sign that the company is moving in a good direction.

That said, a recession would hurt the company's progress since advertisers normally pull back during economic weakness, but that's not a company-specific issue. And with a stronger balance sheet, WPP should have no problem surviving a downturn. That's actually important here, since a good plan without a good financial foundation can crumble when the going gets tough. At this point I believe WPP can execute on its plan even if the economy slumps into a downturn.

7. Still kind of cheap

With all of the positive signs I've highlighted, you might think that WPP's stock would have begun to climb. In fact it has, but not much, since it is still around 50% below the peak prices it saw in 2015. The Graham Number isn't showing a big discount, but is roughly around zero, which suggests at least a fair price. And the yield remains over 6%. With WPP refocusing on the core of its business and showing good results from its efforts, I was far more interested. Add in the debt-reduction efforts, which strengthen the sustainability of the dividend, and I finally chose to pull the trigger not too long ago.

Now, to be fair, I think the dividend is going to flatline until there's more progress on the bottom line, which might put off some dividend investors. I'm willing to give the company the benefit of the doubt based on the progress it is making, though. Another wrinkle here is that WPP pays dividends only twice a year and, as is normal in the U.K., the payments are of different sizes. That, too, might be something that dividend investors don't like. I've decided to accept this little "oddity" in my dividend portfolio. 

Narrowing the uncertainty

All in all, I think that the risks at WPP are fairly low. It doesn't look like it will go bankrupt anytime soon. And the dividend looks increasingly secure, as Read has focused on paying down debt. Those are two giant issues for me. I also believe it is making reasonable attempts to change with the markets it serves, which I think materially reduces uncertainty. In other words, WPP looks like it will muddle through this period and come out the other side a better company. 

That leaves one last question that I always address: Would I want my wife to own this stock if I died? That may sound morbid, but it forces me to focus on the long-term. WPP is one of the world's largest and most diversified advertising agencies. It has been hit by adversity and survived. More importantly, it is making changes to be a better company in the future. It is already showing early signs of success on this front. I'm OK with my wife owning a company like that while collecting a fat 6% yield along the way. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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