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WPP recovered from pandemic but macro uncertainty lies ahead

The huge impairment it took out in 2020 shows how vulnerable advertising agencies are to marco economic volatility.
March 3, 2022
  • Organic revenue ahead of pre-pandemic levels
  • Management has promised to hand out 40 per cent of earnings as dividend

In 2020, WPP (WPP) took a £2.82bn impairment charge to reflect adverse impacts of COVID-19 on the business. Historically, marketing spend has been one of the first costs to be cut by businesses when economic instability arises. This huge impairment therefore reflected WPP’s fear that clients will hand over less money during a period of global uncertainty.

As it turned out, Covid-19 was not the disaster for advertising businesses that many expected. With everyone forced online, companies increased digital marketing spend to capture new customers online. Global advertising spend increased 22.5 per cent in 2021, driven by a 30.5 per cent increase in digital spend, according to GroupM estimates. At WPP, digital billings have now grown to 43 per cent of  total from 41 per cent last year.

This buoyant market helped WPP like-for-like revenue less pass through costs – its version of organic revenue – increase 12.1 per cent to £10.4bn. On a two-year basis, it was up 2.9 per cent, meaning the agency’s top line is now back ahead of where it started before the pandemic arrived.

Pre-tax profit  was £951mn, up from a loss of £2.8bn the year before. Although, if the impairment was removed it would have generated a slight profit in 2020. In fact, operating cash flow was actually down a little this year from £2.03bn from £2.05bn.

Management will be pleased to see that headline operating margin improved 150 basis points to 14.4 per cent. Inflating salaries is a concern in the industry – but staff costs pre-incentives rose just 3.2 per cent and this were counter acted by a 13.2 per cent fall in other costs. Office costs fell presumably thanks to increasing number of employees now working from home.

Management has forecast that operating margin will improve another 50 basis points in 2022 and like-for-like revenue less pass through costs will rise around 5 per cent. In the medium term the intention is to pay out around 40 per cent of headline diluted EPS as dividends. Broker Numis is therefore expecting a healthy dividend yield of 2.9 per cent next year.

While the cash flow and dividend are inviting, the issue for WPP is a macro one. The recent invasion of Ukraine means that global uncertainty is far from passed. Energy costs are certainly going to rise and the huge growth in advertising spend is unlikely to be repeated next year. If WPP thought it needed to take an impairment in 2020, then it must also be considering another in 2022.  Sell.   

WPP (WPP)    
ORD PRICE:1,095pMARKET VALUE:£ 12bn
TOUCH:1,094-1,095p12-MONTH HIGH:1,232pLOW: 826p
DIVIDEND YIELD:2.8%PE RATIO:21
NET ASSET VALUE:357pNET DEBT:72%

 

Year to 31 DecemberTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201715.801.8914.460.0
201813.002.1175.160.0
201913.201.2668.822.7
202012.00-2.70-24324.0
202112.800.9553.431.2
% change+7+13-122+30
Ex-div:09 Jun   
Payment:08 Jul   
*Includes intangible assets of £8.97bn, or 787p a share.