U.S. Markets closed
  • S&P 500

    3,841.94
    +73.47 (+1.95%)
     
  • Dow 30

    31,496.30
    +572.20 (+1.85%)
     
  • Nasdaq

    12,920.15
    +196.65 (+1.55%)
     
  • Russell 2000

    2,192.21
    +45.29 (+2.11%)
     
  • Crude Oil

    66.28
    +2.45 (+3.84%)
     
  • Gold

    1,698.20
    -2.50 (-0.15%)
     
  • Silver

    25.30
    -0.17 (-0.65%)
     
  • EUR/USD

    1.1916
    -0.0063 (-0.5243%)
     
  • 10-Yr Bond

    1.5540
    +0.0040 (+0.26%)
     
  • Vix

    24.66
    -3.91 (-13.69%)
     
  • GBP/USD

    1.3834
    -0.0060 (-0.4344%)
     
  • USD/JPY

    108.3600
    +0.3840 (+0.3556%)
     
  • BTC-USD

    50,516.14
    +2,316.94 (+4.81%)
     
  • CMC Crypto 200

    982.93
    +39.75 (+4.21%)
     
  • FTSE 100

    6,630.52
    -20.36 (-0.31%)
     
  • Nikkei 225

    28,864.32
    -65.78 (-0.23%)
     

Omnicom Offers a Strong Dividend and Solid Fundamentals

  • Oops!
    Something went wrong.
    Please try again later.
GuruFocus.com
·7 min read
  • Oops!
    Something went wrong.
    Please try again later.

Recently, I've profiled several companies on two important GuruFocus screens: The High-Yield Dividend Screener and the High-Dividend Yield Stocks in Guru's Portfolios. The first includes stocks with dividends greater than 4%, while the second takes in stocks that yield at least 4% and are found in the portfolios of the investing gurus.


But there was a problem with that approach--too many dividend stocks that had low predictability scores (with predictability defined as consistently growing revenue and earnings per share). You can find the predictability score, in yellow stars, in the top left corner of a stock's summary page, just below the company name.

And who wants to buy a dividend stock that may not be able to sustain its payments to shareholders? For investors, that's a problem easily solved by using the GuruFocus All-In-One screener to create a new screener that has three criteria:

  • A yield of at least 4%.

  • Included in at least one guru's portfolio.

  • Has a predictability score of at least 4 stars out of 5.



The result is a list of stocks with high yields and ownership by the gurus, but also enjoy strong predictability profiles. Thus, we can have enhanced confidence in the dividend payments from these companies.

On that list, we find the media company Omnicom Group Inc. (NYSE:OMC). It was founded in 1986, when three big advertising agencies were combined: BBDO Worldwide, Doyle Dane Bernbach and Needham Harper Worldwide. In 2020, it is one of the world's largest media companies.

It describes itself this way on its website: "Omnicom is an inter-connected global network of leading marketing communications companies." Its portfolio includes:

  • Three global advertising agencies: BBDO, DDB and TBWA.

  • Two providers of media services: OMD and PHD.

  • A globally diversified group of agencies, under the DAS Group of Companies.

  • Omnicom is also a major provider of public relations, medical and pharmaceutical marketing, customer relationship management and more.



For fiscal 2019, which ended on Dec. 31, the company posted these results:

  • Revenue: $14.95 billion (down from $15.29 billion in 2018).

  • Operating profit: $2.12 billion (down from $2.13 billion in 2018).

  • Net income: $1.34 billion (up from $1.32 billion in 2018).

  • Net income per common share, diluted: $6.06 (up from $5.83 in 2018).

  • Dividends per common share: $2.60 (up from $2.40 in 2018).



Omnicom's clients are major corporations and governments. Since its clients have been affected by Covid-19 and the subsequent economic slowdown, it, too, has shown weakness so far this year.

Not surprisingly, the slowdown has affected its share price, as shown in this 10-year chart:

GuruFocus Omnicom 10 year price chart
GuruFocus Omnicom 10 year price chart

Fundamentals

Turning to its fundamentals, we see it receives a moderate rating for its financial strength:

GuruFocus Omnicom financial strength
GuruFocus Omnicom financial strength

The metrics at the top of the table show Omnicom has long-term debt and the debt is growing, though the GuruFocus system lists it as a medium warning, not serious.

Interest coverage, at more than 8, means it has enough operating income to cover interest expenses more than eight times over.

Where we might be more concerned is with the Altman Z-Score, since Omnicom is currently in the distress zone:

GuruFocus Omnicom altman z-score chart
GuruFocus Omnicom altman z-score chart

However, further examination shows us Omnicom's score is in line with other major companies in the advertising and communications industry:

GuruFocus Omnicom Altman Z-Score
GuruFocus Omnicom Altman Z-Score

Next, we examine its profitability:

GuruFocus Omnicom profitability
GuruFocus Omnicom profitability

A strong showing and, as the green bars indicate, it has been growing its margins as well as its return on equity and return on assets. Also growing are its revenue, earnings before interest, taxes, depreciation and amortization and earnings per share.

Third on our list of fundamentals is a strong rating for valuation (meaning it is relatively inexpensive):

Omnicom valuation
Omnicom valuation

We see here that the price-earnings ratio is in single digits and low when compared to both its competitors and its own history.

For a more specific valuation, we can turn to the discounted cash flow calculator, and have confidence in its output, given that Omnicom scores a 4 out of 5 for predictability. Currently:

  • Current stock price, at the close of trading on July 13: $53.82.

  • Fair or intrinsic value: $82.44.

  • Margin of safety: 34.72%.



Dividends

The dividend yield, at 4.77%, is well above the S&P 500 average of 2%. It is doing well when compared with its peers and its own history.

This 10-year chart of dividend payments implies that the board of directors developed and stuck to a plan for steadily increasing dividends:

Omnicom dividends per share chart
Omnicom dividends per share chart

And this chart shows, Omnicom's current high-yield status is the product of a depressed share price:

Omnicom dividend yield and share price chart
Omnicom dividend yield and share price chart

Turning to the payout ratio, we see it is at a reasonable 43%, which leaves room to grow dividends in the future. And 57% of its earnings are available to grow the company's bottom line.

To double-check on the sustainability of the dividend and its growth, we review the free cash flow picture:

Omnicom free cash flow chart
Omnicom free cash flow chart

A bumpy line, to be sure, but if we were to draw a trend line through it, we would see an upward slope.

The three-year dividend growth rate is strong at 6.5%, which is close to the 10-year median (Min: 2.8%, Med: 8.5%, Max: 64.7%).

The forward dividend yield, at 4.77%, is the same as the trailing 12-month yield, implying there was not an increase in the last quarter. Like many others, Omnicom announces its dividend hikes once a year. Most importantly, it did not cut its dividend in the first quarter, but another earnings release should come out later this month.

For another perspective on the dividend, check out the five-year yield-on-cost at 6.5%; this refers to how much investors might expect to average on dividend returns if they hold the stock for five years, and if the company continues to increase its dividends at the same pace for the next five years.

If we combine the yield-on-cost with a continuation of its share buyback policy, that would push the base, before capital gains, if any, into the high single digits for the next five years.

Finally, from the dividend table, we see the three-year average buyback ratio is 2.6, which means the company has been buying back shares.

However, repurchases have stopped for now. The company announced a suspension in the first-quarter earnings release. It was part of a package of measures adopted to help Omnicom cope with liquidity and financial needs arising out of the Covid-19 pandemic.

Gurus

Among the gurus followed by GuruFocus, 13 have holdings in Omnicom. The lower price has reversed, at least temporarily, the selling trend:

Omnicom guru buys and sells
Omnicom guru buys and sells

First Eagle Investment (Trades, Portfolio), which held the largest position at the end of the first quarter, with 3,698,660 shares, had reduced its holding by 51.5%.

Pioneer Investments (Trades, Portfolio) added another 2.18% to its position in the first quarter, boosting the total to 2,827,339 shares. Richard Pzena (Trades, Portfolio) of Pzena Investment Management reduced his stake during the quarter, by almost 34%, to 1,584,283 shares.

Conclusion

By adding a predictability criterion to the high dividend yield screens, we have been able to identify at least one dividend stock with strong fundamentals: Omnicom.

Income investors and value investors will note the company is currently on sale at a good discount, giving it a margin of safety of almost 35%. Overall, the fundamentals are positive, with a couple of minor concerns.

The dividend has been pushed up, at least temporarily, by the collapse in the share price, and will likely fall again once the economy begins to recover. Like the fundamentals, the dividend situation is also solid, with a couple of minor concerns.

Disclosure: I do not own shares in any companies named in this article.

Read more here:

  • Is This New Dividend Aristocrat a Candidate for Income and Value Investors?

  • Walgreens Boots: A Bargain Stock, But at What Price?

  • Should You Buy this Buffett Stock for its Dividends?



Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

This article first appeared on GuruFocus.