Two blue chip stocks that stopped the rot
- External risk factors are not negligible but are properly assessed
- Previous poor performance was punished too much
This week, we take a look at two very different stocks, both among the global leaders in their respective sectors: WPP (WPP) from the world of advertising and marketing, and Imperial Marks (IMB) of the tobacco industry. Both stocks struggled to provide investors with positive total shareholder returns (TSRs), but the stock price rot of both companies appears to have stalled. Both companies face external risk factors, but could now achieve above-average returns.
Imperial Marks. Tobacco companies have long been a benchmark for high dividend yields and even after cutting its payouts in 2020 (to focus on debt reduction), IMB still offers investors an apparent cash yield of over 8%. %. Trading appears stable, if unexciting, and with dividend coverage (the ratio of earnings per share to dividends per share) of 1.75x, and few other calls to its cash flow. available cash, the chances of investors receiving this high and apparent return are favourable. However, the long-term TSR has been strongly negative, wiping out pure income returns. More recently, the TSR has moved into positive territory with more than 15% reached over one and two years, allowing investors to maintain high incomes. It is also not a security without risk of external regulation, due to its own strategy of taking a stake in a tobacco market with structurally stable or even declining demand and the limited success, to date, of establish a foothold in the fast-growing market for less harmful alternative nicotine products. However, a PE (share price to earnings per share) ratio of just 6.5 times already factors in a lot of the risk.
WPP Group. Investors in this leading global advertising agency have suffered significant negative total returns over the past five years, following years of excessive and often poorly integrated acquisitions and stalled growth. However, three to four years of rationalization, consolidation, divestitures, debt reduction and dividend reduction under new management presents a reinvigorated business operating in a market capable of growing at two to three times the growth rate of the World GDP, well above its long-term norms. Although it offers earnings per share (EPS) growth of an estimated 13% compound annual growth rate (CAGR) through 2024, WPP enjoys a discount both in the market and, more so , on his peers. If this rate of growth can be achieved, which stems from what appears to be a fairly cautious guidance from the board, WPP should be trading at a modest premium to the market, suggesting that the fair value of the shares should be closer to 1200p than the current 1000p. . Investors should finally be able to look forward to positive total returns, again thanks to a modest re-rating.