But it is an indispensable one. Good advertising is as important to business success as good products, good quality control, good research & development, and good management. Interdependency guarantees that if one fails, everything fails. Each is a vital organ of the body whole.
Interpublic Group of Companies (NYSE: IPG) has led many successful ad campaigns. It’s one of the largest advertising and marketing-services companies in the world. It serves a client base spread across many industries and many continents.
It hasn’t always been the success we see today.
Despite a long and storied history, Interpublic was a mess only 12 years ago. New management was brought in to clear away the inefficiency institutionalized by the previous regime. Operating margins of essentially zero in 2005 registered positive in 2007. Since then, they’ve progressively moved to a higher plane.
The Interpublic Dividend
As operating margins go, so too, go earnings. Interpublic’s earnings per share have more than doubled since 2013. As earnings go, so goes the dividend. The annual dividend has more than doubled as well. The dividend — $0.30 per share in 2013 — is $0.72 per share today.
The current dividend payment yields 3.5%. This is the highest the yield has been since the dividend was initiated in 2011. The annual dividend has grown at a 20% annual rate since then.
So why the high dividend yield?
Interpublic experienced an “event,” if I may invoke a deflective, Orwellian word. The event, in this case, was a disappointing quarterly financial report. When the report hit the wires, in late July, sell requests hit the order desks.
Growth, or lack of, was the issue. Interpublic recorded revenue of $1.88 billion for the quarter, a 1.7% year-over-year decline. Reduced ad spending, instigated by political uncertainty in Europe and political gridlock in the United States, was to blame.
As for earnings, they backpedaled more than revenue. EPS of $0.24 for the quarter was a 37% decrease compared with the year-earlier quarter.
But management expects a turnaround in the second half. Management expects to achieve its goal for 3%-to-4% organic growth that it set at the start of the year.
I think the goal will be achieved. It’s worth noting that most of the spending reductions occurred toward the end of the quarter. This suggests reduced spending was likely a spastic reaction, as opposed to the start of a deliberated spending decline. The slowdown in client spending is likely a passing phenomenon confined to this year.
Share Buybacks, Dividend Increases
While we wait for the world to turn, Interpublic management follows through on value drivers within its immediate control: share buybacks and dividend increases.
Interpublic’s annual share buybacks have ranged between $300 million and $500 million since 2011. The company bought back $115 million of its shares in the first half of the year. The share count has been reduced by 29 million since 2013. More buybacks are in store.
Interpublic is on course to earn $1.36 per share this year. The dividend, at the current payout, consumes roughly 52% of earnings. The dividend is not only well covered, it has room to grow. Based on current revenue and operating margin projects, EPS should grow to $1.60 in 2018.
If Interpublic shares were to trade at the peer-group P/E forward multiple of 16, its shares would be priced 25% higher. They should be priced at the peer-group P/E multiple; Interpublic is an industry heavyweight.
Interpublic’s dividend and positive business outlook limit downside risk. Its eventual rebound on rising ad spending offers significant share-price appreciation. For these reasons, I thought it worthwhile to advertise Interpublic’s value proposition.