Dividend Review of Omnicom Group (OMC)

Introduction

Omnicom Group (OMC) is a Dividend Contender who has increased their dividends for the last 10 years in a row.

OMC is an inter-connected global network of leading marketing communications companies. They offer a diverse range of marketing solutions spanning brand advertising, customer relationship management (CRM), media planning and buying services, public relations.

Leadership

John Wren was named President on Omnicom in 1996 and has been the CEO since 1997.

During his time at the help, Omnicom has been named a “Most Admired Company” by Fortune. Mr Wren has also been recognised as one of the best performing CEOs in the world by Harvard business review.

Wren champions the company’s investment in the recruitment and development of top talent through programs such as the Omnicom University.

He is also a member of the International Business Council of the world economic forum and is a member of the board of directors of Lincoln Center for the performing Arts.

Business Analysis

Omnicom currently owns more than 1500 advertising agencies worldwide by helping companies leverage data and technology to help connect them with their customers. According to Advertising Age, Omnicom are the second largest Advertising Agency in the world behind London based WWP Group. Being one of the largest companies means that OMC can help streamline its services and reduce costs for its clients by essential providing a “one Stop Shop” service.

OMC groups its services into 5 main Areas

1. Advertising
2. CRM Consumer Experience
3. PR
4. CRM Execution & Support
5. Healthcare

Advertising currently makes up the bulk of the sales with 56.5%, CRM Consumer Experience is next with 17.5%, PR 9.2% , CRM Execution & Support 9.1% and Healthcare 7.7%

Sales are well-diversified and spread across practically every industry you can think of with Food Beverage, Pharma Health, and Auto making up the top 3 industries.

By Geography sales in the united states account for 53.7%, The UK and Europe account for 27%  with the rest split between Asia, Latin America and the Middle East. In total, about 86% of revenue is from developed economies with 14% coming from emerging markets. 

Company Growth

According to Mr Wren, Omnicom Strategic direction include Driving organic growth by evolving and expanding their service offerings and also Investing in areas of growth with a particular focus on data, analytics, digital transformation, CRM and precision marketing, e-commerce and healthcare communications.

OMC had organic growth of 2.8% in 2019, however Foreign exchange translation decreased revenue by 2.1%. Revenue has been fairly flat since 2012. In the Q1 2020 earnings call, organic growth is up 0.3% however revenue is down 1.8% with foreign exchange making up 66% of this loss.  

Dividends

OMC current Dividend Yield is 4.93% based on the current price of $52.78 which is higher than the 1.96% S&P 500 Dividend Yield.

On 11^th Feb 2019 The Board of Directors of Omnicom Group Inc. (NYSE: OMC) increased the corporation’s quarterly cash dividend to $0.65 per common share, or $2.60 per share of common stock on an annual basis. This represents an 8.3% increase from the previous Dividend.

OMC next dividend will be on July 10^th, 2020 for $0.65 per share.

Dividend Growth

OMC have consistently paid a dividend since 1989. You may be wondering why they are not on the dividend aristocrats list. There were 2 periods where they did not increase their dividends in consecutive years. Back in 2002/2003 and more recently in 2008/2009. It is easy to forgive these two lapses in concentration as they have increased their dividend by more than 20% on 5 occasions over the last decade. This has slowed down over the last 4 years, but the last raise was still a respectable 6.35%. 

OMC stacks up quite favourable when compared to the S&P 500 DGR over the last 15,10 and 5 years but over the last 3 years the S&P500 has slightly better DGR.

Payout Ratio

The Payout Ratio is a good indicator of the sustainability of the current dividend. If the payout ratio is too high that there is a real risk that the dividend could be cut at some point in the future.

Historically, the payout ratio was between 40 to 50% over the last 10 years and they currently have a FCF payout ratio of 49.11% will well below my acceptable threshold of 75%.

Earnings

 Earnings for the year were $6.06 which was an increase of nearly 4% on 2018. EPS CAGR since 2012 is 6.17%. With earnings basically flat during this time the increase in EPS is most likely due to Share Repurchases.

Valuation

From my review it was clear that dividends have grown at a much more accelerated pace than earnings. This was made possible due to a low payout ratio leaving plenty of room to grow. Despite not raising the dividends every year, shareholders have been rewarded with an impressive dividend growth but over the next few years I would expect the trend that we have seen over the last 4 years with a more modest dividend growth rate.

DDM

The single-stage dividend discount model takes into account several factors I have discussed thus far. Using the Dividend Drill Return Model I have calculated both the estimated projected dividend growth rate and also the rate of return

• Current annual dividend payment $2.55
• Projected annual dividend growth – 8.6%
• My desired annual rate of return -13.2%

Using these estimates I come up with a price of $55.43 which means at current values they are under-priced by 2.1%

Closing Thoughts

OMC are in an industry where long-term relationships are important. If a client is happy they are more than likely going to stay with OMC. Long term growth will be driven by consumer spending and we may see an increase in revenues from emerging markets.

The Dividend also looks safe. Although OMC have shown in the past that they may not always increase the dividend, they have not cut the dividend since 1989. The is a real possibility that we may see them keep the current dividend in place for the next year but they have shown in the past that they are committed to provided the best possible return to shareholders.

Disclaimer I am Long OMC and hold a small position in my portfolio. I may be looking to add to my position after Q2 earning report on the 15^th July

Want to learn dividend Investing!

My Friend Dividend Cultivator wrote a guide that takes you step-by-step through the way he personally invests for dividend growth. It works the same way whether you have $100 or $100,000 dollars making this an approachable book for growing your income. Check out his book here. He also has developed a platform that will help you filter and chose your dividend stocks in a matter of seconds. The perfect tool for the busy investor who wants a quick and easy way to filter through 100s of companies.

Disclaimer - Engineer my Freedom is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with a licensed investment professional before you invest your money. This site is for entertainment, informational, and educational use only. Any opinion expressed on the site here and elsewhere on the internet is not a form of investment advice provided to you. We use information, data, and sources in the articles we believe to be correct at the time of writing them, but there is no guarantee of their accuracy, completeness, timeliness, or correctness. We are not liable for any losses suffered by any party because of information published on this site or elsewhere on the internet. Past performance is not a guarantee of future performance. By reading this site or subscribing to it, you agree that you are solely responsible for making investment decisions in connection with your funds.