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WPP posts worst annual results since the financial crisis

The numbers sent the shares down 13 per cent, their biggest one day fall in nearly two decades
March 1, 2018

WPP’s (WPP) chief Sir Martin Sorrell has admitted that 2017 “was not a pretty year”. Revenue fell 0.3 per cent on a like-for-like basis at the advertising giant, while margin difficulty sent reported operating profit down 10.5 per cent to £1.9bn. According to Sir Martin, the last time the numbers were this bad was 2009, during the depths of the financial crisis.

IC TIP: Sell at 1198p

Unfortunately, WPP cannot localise the problems. Like-for-like revenue was either down or flat in three of the group’s four geographic divisions, with only the UK – the smallest locale – providing any growth. There was little to impress in any of the four business sectors, either. Like-for-like revenue was down in both advertising and data investment management, while public relations and brand consulting provided only minimal growth.

The problems, according to Sir Martin, are “the short-term focus of zero-based budgeters, activist investors and private equity”, who have encouraged many companies to cut their marketing spend. But while this helps to explain the 5.4 per cent decline in like-for-like billings and the fact that the value of new billings has fallen again, it fails to acknowledge why WPP’s underlying growth rate is lower than any of its major international peers. Publicis, Interpublic and Dentsu all struggled to grow revenue in 2017 but none reported a decline like WPP. Meanwhile, US group Omnicon managed a 3 per cent increase in like-for-like revenue.

In 2018, Sir Martin thinks global sporting events and the US mid-term elections “should all trigger more marketing investment”, but the first two months of the year have provided little reassurance. Revenue in January was flat on 2017 and down 1.2 per cent after extracting the costs of distributing adverts. With the trend set to continue for the remainder of the year, analysts at Numis have forecast pre-tax profit of £2.03bn and EPS of 116p (from £2.09bn and 120p in 2017).

The broker is also unconvinced of a dividend increase in the current financial year – hardly surprising given the disappointing dent in free cash flow reported in these numbers. Management may have hit its 50 per cent payout ratio target in 2017, but the pace of dividend growth was markedly lower than the previous year.

WPP (WPP)    
ORD PRICE:1,198pMARKET VALUE:£15.2bn
TOUCH:1,198-1,199p12-MONTH HIGH:1,928pLOW: 1,187p
DIVIDEND YIELD:5%PE RATIO:8
NET ASSET VALUE:748p*NET DEBT:45%
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201311.01.3072.434.21
201411.51.4582.438.20
201512.21.4990.044.69
201614.41.8911056.60
201715.32.1114460.00
% change+6+12+31+6
Ex-div:14 Jun   
Payment:9 Jul   
*Includes intangible assets of £15bn, or 118p a share