A Dividend-Raising UK Star

09/21/2012 8:45 am EST

Focus: GLOBAL

The communications firm has been able to boost its business back to pre-recession levels, but can it continue to raise its dividend? Kevin Godbold of The Motley Fool UK reports.

In an outcome that's tough on investors, the FTSE-100 has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE-100 ETF (London: ISF), for example. This is an exchange traded fund that tracks the benchmark index. We can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

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But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is WPP (London: WPP).

The big question is, can the company's dividend continue to outperform its index? Let's test its financial mettle.

WPP is one of the world's largest communications services groups, specializing in advertising and public relations. With the shares at 860p, the market cap is £10.8 billion ($17.5 billion). This table summarizes the company's recent financial record:

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So, the dividend has increased by 83% during the last five years—equivalent to a 16.3% compound annual growth rate.
WPP employs around 162,000 people from 3,000 offices spread over 110 countries. It describes itself as the world leader in marketing communications services, and is the holding company for businesses active in the areas of advertising, media investment management, consumer insight, public relations and affairs, branding and identity, health-care communications, promotion and relationship marketing, and specialist communications.

Around 34% of revenue is derived from North America, 24% from Western Europe, 12% from Britain, and 30% from the rest of the world. In the latest full-year results, revenues topped £10 billion and pre-tax profits exceeded £1 billion.

Looking at the firm's trading record, it's hard to deny the apparent vigor of its customers' businesses, if marketing spend is anything to go by. In fact, WPP trumpets that, at 14.3%, its operating margin "equals a pre-Lehman" high, suggesting that it has recently been enjoying business conditions similar to those before the credit crunch.

Happily, the growth of the dividend reflects recent performance. I then analyze four different features of a company to judge whether its dividend can continue to rise:

  1. Dividend cover: adjusted earnings covered the last dividend around 2.9 times. 4/5
  2. Net cash or debt: net gearing was recently around 50%. 3/5
  3. Cash flow: cash flow has been positive, but lumpy. 2/5
  4. Outlook and recent trading: recent trading has been good with a positive outlook. 4/5

Overall, I score WPP 13 out of 20, which encourages me to believe its dividend can continue to outpace dividends from the FTSE-100.

Foolish summary
Good recent trading, a positive outlook, and strong dividend cover from earnings are all encouraging. If net cash from operations resumes an uptrend going forward, the prospects for the dividend will be good.

Right now, the firm's forecast full-year dividend is around 32p per share, which supports a possible yield of 3.7%. That's not bad, but I'm keeping WPP on my watch list for now.

Read more from The Motley Fool UK here...

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