Is WPP The Ultimate Retirement Share?

Published in Company Comment on 30 August 2012

Will shares in WPP help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at WPP (LSE: WPP) (NASDAQ: WPPGY.US), the FTSE 100 advertising and marketing giant that was founded by Martin Sorrell in 1985. Famous advertising names such as J Walter Thompson, Ogilvy and Young & Rubicam have since been absorbed into the WPP empire, and the company now has operations in 108 countries.

Marketing gains?

Although WPP has delivered substantial share price and dividend growth to shareholders over the years, it has not managed to consistently beat the FTSE 100 over the last 10 years:

Total Return20072008200920102011Trailing 10 yr avg.
FTSE 1007.4%-28.3%27.3%12.6%-2.2%6.9%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

WPP's trailing 10 year average total return of 6.5% means that despite impressive headline figures in some years, the total return for investors owning WPP shares over the last 10 years has been marginally less than the 6.9% delivered by the FTSE 100.

What's the score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how WPP shapes up:

Year founded1985
Market cap£10bn
Net debt£2.5bn
Dividend Yield3.0%
5 year average financials
Operating margin11.6%
Interest cover4.4x
EPS growth14.3%
Dividend growth14.4%
Dividend cover3.2x

Source: Morningstar, Digital Look, WPP

Here's how I've scored WPP on each of these criteria:

LongevityIt's still a youngster, but it operates in a mature sector.3/5
Performance vs. FTSEPretty average.3/5
Financial strengthCustomers are demanding better value but the fundamentals seem ok.4/5
EPS growthAdmirable EPS growth has been helped by many acquisitions.4/5
Dividend growthDividend growth has matched EPS growth.4/5
Total: 18/25

In 2010, WPP announced that it was targeting a 40% payout ratio for future dividends and has so far been true to its word, increasing its latest interim dividend by 18% against an adjusted EPS growth rate of 13%. A score of 18/25 is very respectable and WPP's dividend policy makes it an attractive candidate for a retirement fund portfolio, especially if you believe the company is likely to maintain earnings growth at or above inflation levels.

Expert selections

One way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

> Roland does not own shares in WPP.

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theRealGrinch 30 Aug 2012 , 2:05pm

if you are on the WPP board then the answer is yes.

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