February 27, 2014 8:52 am

WPP shares fall as advertising group misses margin target

Martin Sorrell, chief executive of WPP.©Reuters

WPP shares fell heavily on Thursday after the world’s biggest advertising group missed its target for full-year operating margins and trimmed its forecast for the profitability benchmark in 2014.

The company’s shares were down 5.5 per cent at £12.58 as it also cautioned that competitive pressures within the marketing services industry were becoming “more and more intense”.

Sir Martin Sorrell, chief executive, said that clients were “demanding more for less” and that WPP’s competitors were discounting their pricing heavily, particularly in media investment management.

WPP said group revenues rose 6.2 per cent to £11bn in 2013, with a third of that growth coming from acquisitions. On a like-for-like basis, which excludes acquisitions and currency movements, revenues were up 3.5 per cent – broadly in line with consensus analyst expectations.

The company’s growth has accelerated in recent months, with January like-for-like revenues up 5.7 per cent.

While WPP managed to increase its headline operating margin by 0.3 percentage points to a record high of 15.1 per cent in 2013, this was smaller than the 0.5 point increase that the company had targeted.

The company said it missed its target because of adverse currency movements, as sterling rose sharply against the currencies of many of the fast-growing markets in which WPP operates.

But investors were nonetheless taken aback as the company also cut its target increase in operating profit margins in 2014 to 0.3 percentage points from 0.5 percentage points.

Claudio Aspesi, a media analyst at Bernstein, said: “The numbers are lighter than expected and are leading people to worry about the company’s future trajectory.”

WPP will soon lose its position as the world’s biggest marketing services group by revenues, as its two biggest rivals, Publicis and Omnicom, are set to complete a $35bn merger in the third quarter this year.

The company is also facing increased competition from companies in sectors such as software, accounting and consulting, which in recent years have started moving aggressively into digital marketing services.

To compensate for its lower margin target for 2014, WPP said it would more than double the size of its share buyback programme.

WPP said it would increase its level of share buybacks from about 1 per cent of its outstanding share capital to 2-3 per cent. If achieved, it said headline earnings per share would improve by the equivalent of 0.2 margin points.

The company also increased its final dividend by 20 per cent, bringing the total dividend for the year to 34.21p per share. The company added that its dividend payout ratio would be increased by 5 percentage points to 45 per cent over the next two years.

Having completed 62 acquisitions in 2013, WPP said it planned to spend about £300m to £400m a year on acquisitions and investments in the coming years, particularly in faster growing geographic markets and sectors, as well as in technology and “big data”.

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