ii view: dividend hike, but recession risk looms for WPP

Reporting profit growth and upping its interim dividend by 20%, we assess prospects.

First-half results to 30 June

• Like-for-like adjusted revenue up 8.9%
• Pre-tax profit up 12% to £562 million
• Interim dividend up 20% to 15p per share
• Adjusted net debt of £3.1 billion, up £1.6 billion on its share buyback programme

Guidance:

• Expects full-year 2022 adjusted like-for-like revenue growth of between 6% to 7%, up from 5.5% to 6.5%
• Guidance for the full year 2023 to be given as of its results in February

Chief executive Mark Read said:

"We have enjoyed a strong first half, with broad-based growth across our creative, media and public relations businesses. This reflects the improved competitive position of our creative businesses, with their growing capabilities in commerce, experience and technology, our continued strength in media and the resurgence in demand for strategic communications advice from our public relations agencies.”

ii round-up:

Advertising giant WPP (LSE:WPP) today upped its full year sales estimate and hiked the dividend payment but offered increased uncertainty regarding the outlook for 2023. 

The FTSE 100 company now expects full-year adjusted like-for-like revenue growth of between 6% to 7%, up from a previous 5.5% to 6.5%, with a 12% increase in pre-tax profit to £562 million pushing a one fifth increase in the interim dividend payment to 15p per share. 

However, despite reiterating medium term estimates for adjusted like-for-like revenue growth of 3% to 4%, guidance for the full year 2023 will be given as of its 2022 full-year results in February. 

WPP shares fell by more than 6% in early UK trading having come into these latest results down by around a fifth year-to-date. Shares for TV advertiser ITV (LSE:ITV) are down by just over a third during 2022, while shares for US online advertising giants Google owner Alphabet Inc Class A (NASDAQ:GOOGL) and former Facebook company, Meta Platforms Inc Class A (NASDAQ:META), are down by 18% and 49% respectively. 

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Ongoing pandemic hinderance in China, a consumer cost-of-living crisis, rising interest rates globally, and a war in Ukraine all continue to worry investors regarding possible cuts to corporate advertising budgets.

Second quarter like-for-like revenues for its Chinese business fell 6.1%, although client demand remained strong across most segments and regions. 

Broker Morgan Stanley highlighted that the deferral of guidance for 2023 is in line with peers and flags the significant macro uncertainty around next year. 

A third quarter trading update is expected in October. 

ii view:

Started in 1971, WPP Group today employs over 100,000 people. It operates through the three divisions of Global Integrated Agencies, Public Relations and Specialist Agencies in over 100 countries. The US generates its biggest slug of sales at around a third, followed by the combined Asia, Africa and Latin America at just under 30% and Europe at just over a fifth. The UK accounts for almost 15%. Group customers include Danone SA (EURONEXT:BN), Coca-Cola Co (NYSE:KO), AstraZeneca (LSE:AZN), Uber Technologies Inc (NYSE:UBER), and Sainsbury (J) (LSE:SBRY).

For investors, a highly uncertain economic outlook for its corporate customers cannot be overlooked. Advertising has historically been geared to economic ups and downs, business costs generally have been rising while the pandemic in China and souring relations with the West over Taiwan also warrant consideration. 

More favourably, growth during the current financial year has to date has proved robust. Diversity in terms of both product and geographical region is enjoyed, investments in digital transition opportunities are being made while an estimated dividend yield of over 4% is not to be forgotten. On balance and while some caution looks sensible, long-term fans of this transforming advertising giant are likely to stay patient. 

Positives: 

• Diversified product and geographical offering
• Attractive dividend (not guaranteed)

Negatives:

• Media demand is historically cyclical
• Foreign exchange movements can hinder growth

The average rating of stock market analysts:

Strong hold