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Shares in the advertising giant fell by over 16% this week bringing the fall from an all-time high down to an almost staggering 60%
The company released preliminary results for 2019 in a report released showing profit before tax has tumbled by 21.9% as an overall net profit figure is down almost 30%. On an ‘Investor Day’ held by WPP Plc on 11 December 2018, it was revealed that the organisation would undergo a restructure and transformation process. This incurred a huge amount of exceptional costs totaling £202m.
Goodwill impairment decreased the profit for the year from £138m for 2018 to £11m in 2019. As expected interest rates and taxes had decreased by 22% for the 12 month period. A regional overview of the revenues showed that as the UK’s revenue for WPP Plc increased by 1.8%, it fell by 5% for North America; which makes up the majority of WPP’s turnover.
We can also see from the report that the lower operating from of 662m was coupled with a lower margin of 16.4%; in contrast 2018 a headline operating profit of £711m and margin of 17.5%.
WPP experienced a disappointing end to the year based on these results which led to a selloff in shares from investors. It was said that the report was compiled prior to any impact from the coronavirus but it appears the market’s patience has worn thin as the share price slipped today. Investors can hope for retained earnings for 2020 but not expect much growth over the next 12 months. The dividend has remained at 60p and analysts forecasts haven’t changed much either.
With a review of the strategic operations currently in place, CEO Mark Read has had a flaky start to his role which started at the end of 2018. Although the company will struggle to cover its final dividends- which are to be paid in June 2020 – forecasts show future pay-out ratios in the 60% region. Analysts also predict a solid 6% yield in place for the foreseeable future.
Based on my findings above and a debt ratio that is well covered by operating cash flow, I would rate WPP Plc a buy. You can pick up this bargain share at more than 50% below its fair value at current prices and enjoy both capital growth in years to come as well and a healthy dividend income. If profits have decreased due to a streamlined process of restructuring in order to help the company run more efficiently, I have no worries about its ability to bring in more profits over the next 3 years and please shareholders going forward.
Saam Hanza personally holds shares in WPP Plc
