Back WPP's winning strategy

WPP, whose brands include Ogilvy & Mather, Kantar and GroupM, counts 355 of the world's 500 largest companies among its clients. The group - which started out as a shell company manufacturing wire shopping baskets and has been headed by Sir Martin Sorrell since 1987 - continues to drive growth by investing in emerging technologies, industries and territories, and promoting collaboration between its agencies.

That strategy fuelled a 6.3 per cent rise in constant-currency net sales last year and there are good grounds to hope for more of the same in the future. In 2014 revenue and operating profit rose across its advertising, public relations, data and branding divisions. Operating margins widened in three of the four segments thanks to cost control, restructuring and disposals. Profitability has been aided by the group's ongoing pruning of its operations; for example, it recently laid off workers in the mature markets of western Europe. Overall, the group's underlying operating margin widened by 30 basis points last year to 16.7 per cent and management has targeted similar margin expansion in the current year. Meanwhile, from a geographic perspective, like-for-like net sales rose in all four of the group's territories, led by 5 per cent growth in the UK and emerging markets.

WPP's strong showing last year builds on its impressive track record. Sales have climbed a third between 2009 and 2014, while pre-tax profit has more than doubled. And the progress looks set to continue, with broker Numis forecasting that pre-tax profit will rise about 9 per cent this year, sending EPS up 10 per cent. Those forecasts should be underpinned by the group's proven ability to attract good levels of new work. It won £5.83bn in net new business last year, which was not far off the record £6.12bn in 2013. Accordingly, WPP expects both like-for-like revenue and net sales to rise by more than 3 per cent this year. It has made a strong start: net sales were up 3.9 per cent in January, with growth in all sectors and regions bar Latin America.

WPP is also making strides in its pursuit of digital and emerging markets growth. Revenues from Asia Pacific, Latin America, Africa and the Middle East and central and eastern Europe have climbed 48 per cent in the past five years, sending operating profit up 90 per cent to £561m over the same period. Emerging markets accounted for 29.7 per cent of WPP's revenue and 33.3 per cent of operating profit last year. Meanwhile, direct, digital and interactive sales rose about 11 per cent last year to account for 36 per cent of group revenues. WPP plans to generate between 40 and 45 per cent of its revenues from both digital and emerging markets over the next five years.

The group is also boosting sales by promoting internal collaboration and cross-pitching. Well over a third of new assignments in 2014 were generated from the work of two or more of its companies, and it provides four services to 534 clients.

And WPP will continue to supplement organic growth with acquisitions, which accounted for roughly half of top-line growth in 2014. It spent £274m on deals last year as it completed 36 purchases and investments in new markets and 53 in quantitative and digital. It has also struck technological partnerships with AppNexus, Rentrak and ComScore in recent months, bolstering its stakes in real-time online advertising exchanges and measurement of digital TV and film audiences. In the future, WPP is targeting spending of between £300m and £400m on acquisitions annually, excluding larger one-off deals.

The group also ramped up spending on share repurchases by 59 per cent to £314m last year. Analysts expect it to buy back 40m shares a year, as WPP seeks to maintain underlying EPS growth at the 10-15 per cent level. And management could boost dividend growth by raising the dividend payout ratio after hitting a target of 45 per cent a year ahead of schedule.

WPP's main challenges will be fierce competition with rival agencies such as Publicis and Omnicom, and its clients' growing emphasis on cost-cutting. The upcoming election in the UK is also fuelling uncertainty, as a Labour victory could mean a crackdown on big business, while a Conservative win could mean a referendum on EU membership.