You usually expect big cap stocks to deliver slow but steady dividend growth. So when two FTSE 100 members announced 20%-plus dividend increases on Friday morning, it caught my attention.
Are these big hikes a buy signal for income investors, or are these firms trying to distract shareholders from bad news elsewhere?
Record revenues in 2016
Advertising giant WPP (LSE: WPP) had a good year in 2016. Revenue rose by 17.6% to £14,389m. That’s a 7.2% real-terms increase, excluding exchange rate effects. Adjusted pre-tax profit rose by 22.4% to £1,986m, up 9.1% on a constant currency basis.
Like-for-like sales, a key performance measure which strips out the impact of WPP’s regular acquisitions, were 3.1% higher.
WPP’s adjusted earnings per share of 113.2p were in line with forecasts, and the firm had already announced plans to increase its dividend payout ratio to 50% of earnings. So the 26% dividend increase to 56.6p per share wasn’t a huge surprise.
What’s going wrong?
But WPP’s record 2016 results were not enough to stop the firm’s shares falling by 6% on Friday morning. The problem is that investors pay a lot of attention to the outlook statement provided by chief executive Sir Martin Sorrell. And according to Sir Martin, the outlook isn’t great.
Post-Brexit prospects in the UK are “mixed”, while growth opportunities for the firm’s clients were described as “challenging”. Growth is expected to remain low this year, in line with the last few years.
Is WPP a buy?
Martin Sorrell has been sounding a cautious note for several years. But WPP’s results have remained solid. I’m tempted to view today’s sell-off as a round of profit taking, after a year in which the shares gained nearly 25%.
WPP stock now trades on a 2017 forecast P/E of about 14, with a prospective yield of 3.5%. I’ll continue to hold, and may consider adding more to my position.
Failure to merge
The proposed merger deal between London Stock Exchange Group (LSE: LSE) and Deutsche Börse is expected to fail due to LSE’s inability to meet all of the EU regulator’s demands.
In LSE’s full-year results on Friday, the group said it would continue working on the deal until EU regulators make a formal decision in a month’s time. But the merger is not expected to complete.
The good news is that LSE’s business is trading well without Deutsche Börse. Total income rose by 17% to £1,657.1m in 2016. But operating profit was only 6% higher at £426.8m. This implies that the group’s operating profit margin fell from 28.5% to 25.8% last year. That’s disappointing, but not a problem. LSE’s margins have always been variable from year to year.
The surprise news was that the dividend will be increased by 20% to 43.2p per share. LSE says that this reflects “the strong outlook for the group”. But I suspect it’s an attempt to compensate shareholders for the likely loss of the merger.
Today’s results leave LSE trading on a P/E of 25 with a dividend yield of 1.4%. Further growth is expected in 2017, but in my opinion most of the upside is already in the price. I’d hold, or perhaps take profits and invest in a new opportunity.
