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I was looking for a top dividend stock to add to my portfolio and was stunned to see which company now offers the highest yield on the FTSE 100.
In recent times, top spot has bounced between financials like M&G and Phoenix Group Holdings, with housebuilder Taylor Wimpey close behind. But now there’s a surprise leader: media and advertising group WPP (LSE: WPP), which I’ve always thought of as a growth stock. Not these days, sadly.
The trailing yield’s enormous, currently sitting at 9.3%, but that’s mostly down to the group’s lamentable performance. The WPP share price has dropped 18% in the past month alone and almost 45% over 12 months. That’s created the illusion of a bargain, with a price-to-earnings ratio of just 8.3.
Yet I’ve learned that when the numbers look too good, they often are. A falling share price isn’t always a buying opportunity. Sometimes it’s the opposite.
WPP share price is horrible
WPP’s lost a chunk of its value since issuing a profit warning on 9 July. It now expects like-for-like revenue to fall between 3% and 5% this year, with operating margins under pressure too. That’s a sharp downgrade from its previous guidance of flat growth.
The drop in second-quarter sales came as clients tightened ad budgets. Redundancy costs are rising as well, suggesting more restructuring pain ahead.
Things have been going south for a while. The business has struggled ever since founder Martin Sorrell left in 2018. It’s faced major client losses, growing digital competition and a need to modernise its complex structure.
That ultra-high yield’s a symptom of this decline, not a sign of strength. The dividend has been frozen at 39.4p since 2022. If trading doesn’t improve, a cut seems likelly. That would hammer sentiment further.
Dividends aren’t enough
The biggest question hanging over WPP is artificial intelligence (AI). Outgoing CEO Mark Read has said AI is “totally disrupting” the ad industry. Sounds like he’s glad to get out.
Platforms such as Meta and TikTok let businesses run sleek campaigns in-house, slashing their reliance on outside agencies and putting WPP’s core model in jeopardy.
It’s investing in AI tools and adapting fast. So this is an opportunity as well as a threat, but I think the threat’s higher, and the share price reflects that.
WPP still has the clients, talent and resources to fight back. New CEO Cindy Rose, who joins in September, brings strong tech credentials and will need all of them. But turnarounds take time. I’ve made the mistake before of buying too soon after a profit warning. I won’t repeat it here.
High-risk recovery play
WPP still has deep ties with global giants such as American Express, Nestlé and GSK. It’s also well-placed to keep investing in digital services and AI tools, which could help stabilise things if demand returns.
For investors who like to take a contrarian punt, this might be one to consider buying. But they must be prepared for further short-term losses. I’m not writing WPP off but it faces a long and bumpy road back. There’s a chance the terrain will prove too bumpy.
At this point, I’d rather keep looking for income stocks with fewer question marks hanging over them. Happily, the FTSE 100 offers plenty of those. I mentioned three of my favourites at the start.
