Payback Time
As economic recovery begins, investors want higher dividends; CFOs want more investments to grow their businesses. Who wins?
Poul Funder Larsen - CFO Europe Magazine
March 18, 2004
The year 2002 was something of an annus horribilis for the media business, and Paul Richardson, CFO of global advertising and media services group WPP, faced his share of problems. After-tax profit at the £3.9 billion (€5.8 billion) group had slumped by nearly two-thirds, to £102m, amid the second year of contracting global advertising spending. With the war in Iraq looming on the horizon, stock prices were depressed and forecasts for media markets subdued. But when it came to declaring its dividend WPP and Richardson didn't waver — despite weakened profitability the company hiked its dividend by 20%.
Priorities have changed at WPP over the last few years. Founded in the mid-1980s by Martin Sorrell, former group finance director of legendary ad agency Saatchi & Saatchi, the company grew rapidly for nearly two decades through acquisitions. Its share price also grew, culminating in a near tripling in 1999. With those kind of capital gains, investors were happy with a policy of paying just 20% to 25% of earnings as dividend. But, as with most high-growth media and technology stocks, the bubble burst and WPP's stock fell long and hard. In 2002 alone it more than halved, from above £8 to below £4. But in the same year WPP paid out 71%, or £62.5m of the £88m profit attributable to ordinary stock owners.
For Richardson, the business downturn didn't warrant a break with the company's new strategy of steadily increasing the dividend. "Our margin was down, but the business is robust and the cash flow still good," he says.
WPP's new dedication to dividend growth is far from unique. Companies have responded to investors, who have learned to focus more on dividends in the