“Free” does not necessarily mean what you think it does. Neither does “Today Only” … not if you’re wandering in woods that are infested with marketing copywriters.
In this case, “Free” means “Free with-subscription-to-my-paid-newsletter-for-$100″… and I don’t know what “Today” means, but I first saw the ad from Chloe Lutts Jensen at Cabot yesterday and, well, the “deal” is still available today. So I guess “Today” means “the day you’re looking at it, not the day I published it.”
Regardless, what we’re looking for here is the solution to the teaser they throw into the ad to pique your interest — what is their “No. 1 Income Stock”, and is it worth investing in? I can answer the first part of that, and perhaps share some opinion on the second part, we’ll just dig into the clues and get started.
(By the way, on another front from the same publisher we’ve also had a bunch of readers asking about the “Top Stock of the Month” pitch from Cabot that’s been circulating, about a leader in lithium battery technology … so, TODAY ONLY, I can share that answer with you in this FREE article… and yes, it’s the same pitch they were making back in September).
But back to our income stock — who is it? Here’s the first part of the tease:
“Rock Solid Income and Capital Growth You Can Depend On
“Over the past five years, our No. 1 pick has handed investors 20% annual average returns while also handing them a safe and sane 2.6% dividend, for a total return of 104%. As a result, a $10,000 investment here would now be worth over $20,000.
“We see these kinds of total returns continuing for the next five years.”
Pretty reasonable pitch for an income stock — doubling in five years and a current yield about 50% higher than the S&P… nothing too wild or dramatic, but enough to get your attention.
And how about some details that we can feed into the Mighty, Mighty Thinkolator to get an actual answer? Chloe obliges:
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“The company has paid dividends since 1990, has never cut or suspended the dividend, and has increased the dividend every year since 2010.
“… over the past five years, the company has boosted the dividend by an average of 27% per year….
“Free cash flow per share grew 35% in 2013 and 14% in 2012, and although revenue growth has been uneven over the past year, analysts expect overall EPS growth of 9.6% this year and 9.3% next year.
“The company’s current payout ratio of 44% should provide support for continued dividend increases in at least the high single-digit percentage range going forward.”
So we can probably get a name for you from that, but given the squishiness of some of these numbers we might not be 100% right… which is why I’m so pleased that we got a few more clues:
“This $21 billion company [is]… an advertising juggernaut that’s generating $15 billion in annual sales and is growing its quarterly earnings at an incredible 24%!”
Which is enough, for sure, to give us certainty that the Thinkolator’s answer is correct: This is Omnicom Group (OMC), the giant advertising agency conglomerate.
Omnicom has been around for a long time, and is built on three core advertising agencies (including BBDO and DDB) who merged in the mid-1980s to form the group, which has since expanded, sucked in more agencies and services, and is now second in size only to WPP (though Publicis and the Interpublic Group are also very large competitors — Omnicom and Publicis tried to merge last year, but it fell through).
They have indeed raised the dividend very aggressively in recent years on the back of strong earnings growth, helping the stock to double in the last five years and maintain, yes, a pretty healthy payout ratio (it is in the 40-50% range, where it has mostly been since they resumed dividend growth in 2010).
They actually paid dividends before 1990, too, according to their financials, but they were paltry — they raised it a few times over the years, but not routinely every year as so many companies like to do (and as so many dividend growth investors like to see), until 2010 when they started bumping it more sharply as we emerged from the financial crisis… the payout was 60 cents a year in 2009, before the hiking began, and is at $2 a year now and will likely, it seems, be lifted again at some point in the next couple quarters. Likewise, the trailing earnings per share has gone from about $2.50 four years ago to $4.20 today.
The 1990s were spectacular for Omnicom as it grew during the heady internet days, but more recently, for the last 15 years or so, it has more or less done as well as the S&P 500 — though with a lot more volatility — and, as with the S&P, close to half of that performance has come from dividends. So it might not sound like a staid, stable stock, and it’s certainly had some wild moves over the years, but over time it’s done as well as the market and, usually, slightly better. Free cash flow is not terribly impressive over time, so I’m not sure why they focused on that in the ad — free cash flow per share for Omnicom is about the same as it was five and ten years ago — but earnings growth has been good, so that has continued to drive the stock higher.
I don’t know a lot about the dynamics in this industry (For whatever reason I’ve found it more appealing to own the ad networks, like Google and Facebook, rather than the ad services agencies like WPP, IPG or OMC), but it is interesting that Interpublic (IPG), which is about half the size, has a considerably lower return on equity and a similar dividend payout ratio and yield, but has much higher earnings growth last quarter and trades at a PE of 25, versus 18 for OMC. Both are growing, IPG much less steadily but (on average) faster.
I haven’t read up on the current prospects for any of the big advertising/PR/marketing services agencies, but they are generally economically sensitive so they’ve all done pretty well over the past five years (and badly for stretches before that, like in 2008-2009 and the early 2000s), and the best of them have all combined into the current four big holding companies who seem pretty set now — after Omnicom/Publicis failed last year, it’s a little hard to imagine any of the other goliaths merging.
They’re profitable, they pay a decent and growing dividend, they’re likely to continue to be quite cyclical, and they aren’t cheap at current prices — kind of sounds similar to lots of other stocks you’re looking at, I’m guessing. If Omnicom appeals to you, or if you delight in Interpublic or WPP or any of the others (or Facebook or Google or Twitter, for that matter), or think they all stink, let us know why with a comment below.