Shares of the global ad agency Omnicom Group (NYSE:OMC) are down another 2.6% after Barclays put a downgrade on the firm, moving down the consensus estimate from a previous hold. The downgrade led to another decline in Omnicom’s share price. So far, shares are down 10.5% during the past quarter and in total down 6.3% year to year.
Omnicom has experienced a rough year with news that the market segments for ad agencies may be less attractive. Consumer firms are spending less and less on ads which naturally hurts Omnicom’s revenue.
Sales in 2016 revenue came in at $15.417 billion and two years later, the firm expects to show close to $15.470 billion. That’s a marginal increase when taking into the account that most American firms have experienced a significant increase in their earnings after the tax cut.
Some investors might find some positives when looking at the numbers for 2020. By fiscal 2020, Omnicom should have a net income of $1.35 billion and EBITDA should land on $2.4 billion, up from previous $2.39 billion.
What this means for investors is increased earnings per share, a lower price to earnings ratio and a higher dividend yield.
Omnicom Group is cheap
Omnicom looks very cheap based on a price to earnings ratio. The current P/E is 12.58 and the forward P/E is 11.78. That’s far lower from where the current P/E for the S&P 500 which is 25.29. It is common knowledge within the world of investment that a P/E of 15 is a fair historical mean for most firms. One could therefore state that the average holding in the S&P500 is expensive, while Omnicom is a bargain.
Omnicom’s dividend increases
Omnicom Group is expected to pay $2.43 per share in 2018, $2.56 per share in 2019 and $2.61 in 2020. This corresponds to a current 3.53% yield in 2018, and 3.63% and 3.71% in 2020.
But it’s when we include the compounded annual growth rate of the dividend that things really start to look interesting.
Omnicom Group increased the dividend by 5% last year, but normally operates with a double-digit yearly increase, close to 13% in the past 5 years. If we go back as for as 20 years, we notice that Omnicom has increased the dividend on average by 12% during those years.
Furthermore, Omnicom’s payout ratio is only at 43%, meaning that the firm has room for further dividend growth while maneuvering the business in a short – term challenged environment.
Omnicom Group has also been rewarded a place in the dividend aristocrat list due to their commitment to paying stable and consistent dividends. This is often a sign of a stable and predictable business with some kind of competitive advantage.
At last, we note that Omnicom Group has generated positive free cash flow in the past 10 years and has experienced earnings growth in the each of the last three quarters.
There are 16 analysts following the firm and the mean consensus is a hold. The lowest target price is $60 which provides a 15% negative spread towards the current price at $70. The highest target price is $85 which provides a positive 21% spread at the current price. The mean average target price is $73 which provides a 4.5% positive spread excluding the annual dividend at 3.5%.
In total, Omnicom Group in my view looks cheap based on key metrics such as price to earnings. Analysts operate with a 4.5% upside price potential, which means that the total return should be around 8% if one chooses to consider Omnicom.
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Disclaimer: The author owns shares in Omnicom.