Interpublic covers the spectrum of advertising and marketing disciplines, from traditional services such as consumer advertising and direct marketing to emerging services such as mobile and search engine marketing.
Though the company doesn’t name names, it claims a diversified client base spread across industries and geography. Its top 10 clients account for 20% of annual revenue, with the largest client accounting for only 4%.
Business has improved impressively since 2005. New management was brought in to clear away the inefficiency of the previous regime. Operating margins have been on an upswing for the past decade, and so have revenue and earnings growth.
A dividend was initiated 2011, and it has grown annually since. The $0.24 per-share dividend that prevailed in 2011 has grown at a 20% average annual rate. The dividend is currently paid at $0.72 per share annually for a current yield of 3.4%.
Following a disappointing quarterly financial report in late July, Interpublic shed nearly 16% of their value. The main driver cited for the shortfall was reduced spending by Interpublic’s top 20 clients.
We believe that the slowdown in client spending is a passing phenomenon confined to this year.
This is likely as bad as it gets. While we wait, management continues to follow through on value drivers within its immediate control: dividend 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. More buybacks are in store.
As for the dividend, it remains well covered. We expect Interpublic to earn $1.36 per share this year. Based on current revenue and operating margin projections, EPS should grow to $1.60 in 2018. The dividend is not only well covered, it has room to grow.
Our target price is $25.50 based on a peer-group P/E multiple of 16 applied to 2018 EPS estimates. The multiple is in line with industry peers.
Interpublic, given its size and management, is deserving of at least the market multiple. When the dividend is factored in, we expect Interpublic investors to see at least a 20% total return within the 12 months.
Given Interpublic’s positive business outlook, the downside risk is limited while upside potential abounds in the value-priced stock. We perceive nothing but a buying opportunity.
Ian Wyatt is publisher and chief investment strategist at Wyatt Investment Research.
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