- External risk factors are not insignificant but are fairly priced
- Previous poor performances have been overly punished
This week we look at two very different stocks, both among the global leaders in their respective industries: WPP (WPP) from the world of advertising and marketing, and Imperial Brands (IMB) from the tobacco industry. Both stocks have struggled to provide investors with positive total shareholder returns (TSR), but the rot in the share price of both companies looks to have stopped. Both companies face external risk factors, but could now be able to make above-average returns.
Imperial Brands. Tobacco companies have long been a go-to for high dividend yields and even after cutting its payout in 2020 (to focus on debt reduction) IMB still offers investors an apparent cash return of more than 8 per cent. Trading looks stable, if unexciting, and with dividend cover (the ratio of earnings per share to dividends per share) of 1.75 times, and few other calls on its free cash flow, the odds on investors receiving that high, apparent yield are favourable. However, long-term TSR has been heavily negative, wiping out the pure income returns. More recently, the TSR has moved into positive territory with over 15 per cent achieved over one and two years, allowing investors to retain the high income. This is not a stock without risk from external regulation either, through its own strategy of taking share in a tobacco market with structurally flat-to-declining demand and the limited success, to date, in gaining a foothold in the fast-growing market for less harmful, alternative nicotine products. However, a PE ratio (share price to earnings per share) of just 6.5 times does already take a lot of the risk here into account.