WPP outlines dividend and growth plans, and jury still out on Serco and the outsourcers

“Belief continues to build in the idea a Brexit deal can be brokered, despite slightly guarded comments from both sides of the negotiation, with sterling advancing strongly,” says AJ Bell Investment Director Russ Mould.

“The FTSE 100 was also higher, pushed up by domestic-facing stocks and miners. The other big story is the US stimulus package which is undermining the dollar but improving market sentiment as it looks like the Republicans and Democrats are closing on an agreement.

“Having surged through $20,000 yesterday bitcoin shows no sign of stopping – battering through the $22,000 mark on Thursday morning.

“It emerged this week that mainstream asset manager Ruffer had taken a position worth hundreds of millions of pounds in bitcoin and this may be driving the idea that the cryptocurrency is entering a new phase as more institutional investors could use bitcoin to diversify their portfolios.”

WPP

“The latest update from advertising agency WPP suggests it was more a case of growth disrupted and delayed than entirely deflated by coronavirus.

“2020 was supposed to be the year that the turnaround strategy under CEO Mark Read moved from consolidation, or making sure things didn’t get any worse after the acrimonious departure of CEO Martin Sorrell, to progressing the business.

“A global pandemic put paid to such lofty plans. Now an investor day signals how Read and his finance chief, the well-regarded John Rogers who was poached from Sainsbury’s last year, intend to fully revamp WPP.

“The company is adapting to a more digitally-focused future, noting the acceleration in this area driven by covid. It is also simplifying the corporate structure by merging brands, creating closer links between individual businesses within the group, investing in tech and making operations more streamlined. Cost savings will be funnelled into acquisitions, which will play a role in, for example, bolstering its footprint in e-commerce.

“One question is whether WPP’s mixed legacy, which includes an entrenched position in the market, offering influence and reach, makes up for the more analogue parts of the group or if it could be left behind by the more agile pure digital plays, like Sorrell’s own latest venture S4 Capital.

“In the context of a year of dividend disappointment the increase in the dividend announced today and a renewed share buyback programme, plus a commitment to increase capital returns to shareholders in the longer term, will be greeted like a glass of water in a desert.”

Serco

“Are we in a new era for big outsourcing companies? The sector has developed a terrible name over the past decade because of fraud, contract scandals and widespread inability to perform the task to the required standards. For a while the sector’s reputation was tarnished and once-successful companies had to go tail between their legs and sort themselves out.

“Now there seems to be a comeback, as evidenced by Serco which is this year forecast to report its third year in a row of profit growth.

“It is interesting to note management’s strategy of being open and honest in commenting on trading and earnings expectations, which some would say is the complete opposite of how outsourcing companies used to behave.

“Serco is also paying back UK Government support in the form of deferred taxes and furlough, again the right thing to be doing if you want to regain credibility.

“However, the sector has still come under criticism this year for the way in which big companies won PPE contracts when they had little apparent experience in this field or won contact tracing contracts without a competitive tender. Notably, there have been accusations that big outsourcers including Serco won work because of their political connections.

“You could say we’re coming back full circle where big outsourcers are having their moment in the sun, but at the end of the day their success will be judged on the ability to do the job properly and the jury is still out.”

These articles are for information purposes only and are not a personal recommendation or advice.