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Richard Pzena Is Bullish on This Advertising Business

Monday - 5/20/2013, 4:20pm  ET

Richard Pzena, the founder and the Co-CIO of Pzena Investment Management, is currently managing nearly $20 billion in total assets. He focuses on businesses which have recently seen earnings below their normal levels, and are trading at low prices compared to their normalized earnings power. In addition, the business should have tangible downside protection and management should have a sound plan for improving the company’s earnings.

In the first quarter of 2013, Richard Pzena bought nearly 10.9 million shares of The Interpublic Group of Companies . This position accounted for nearly 1% of his total portfolio. Since the middle of November 2012, Interpublic has increased significantly, from $9.60 per share to nearly $15 per share. Should we follow Richard Pzena into Interpublic? Let’s find out.

A growing business at a reasonable valuation

Interpublic is one of the global advertising and marketing services companies with 43,300 employees in more than 100 countries, operating in three global networks, McCann, Draftfcb, and Lowe. Moreover, it also has IPG Mediabrands, with three global media services companies such as UM, Initiative, and Brand Programming. What makes me interested is the company’s customer concentration in large corporations.

Its top ten clients have accounted for around 22% of its total revenue in the past two years. Its five largest clients were General Motors, Johnson & Johnson, Microsoft, Unilever, and Verizon. Most of its revenue, 54.7% of the total revenue, was generated from the U.S. market while Asia Pacific ranked second, accounting for 12% of the total revenue.

Since 2009, Interpublic has witnessed growth in both its top and bottom lines. Revenue increased from $6 billion in 2009 to nearly $7 billion in 2012 while net income shot up more than three times, from $121 million to $447 million during the same period. In 2012, it generated $357 million in operating cash flow and $188 million in free cash flow.

Interpublic is trading at $15 per share with a total market cap of more than $6.4 billion. The market values Interpublic at 9 times EV/EBITDA. Compared to its peers Omnicom Group and WPP Group , Interpublic is the smallest company with a relatively reasonable valuation.

Omnicom – the highest dividend yield

Omnicom is one of the largest advertising and marketing companies in the world. Most of its revenue, $6.76 billion, or 47.6% of the total 2012 revenue, was generated from the advertising segment. The CRM segment ranked second, with $5.12 billion in revenue in 2012, while the Public Relations segment and the Specialty Communications segment contributed $1.29 billion and $1 billion, respectively. Omnicom has consistently increased its dividends in the past ten years. The dividend has climbed from $0.40 per share in 2003 to $1.20 per share in 2012. Interestingly, the payout ratio was quite decent, fluctuating in the range of 18.9% to 33.2%.

At $63 per share, Omnicom is worth $16.3 billion on the market. The market values the company at 8.9 times EV/EBITDA. Recently, the company increased its quarterly cash dividend by 33% to $0.40 per share. Thus, the annual dividend payment is $1.60 per share.

WPP also offers consistently increasing dividends

WPP, based in the U.K., also has a market leading position in advertising and marketing services with several famous networks including Ogilvy & Mather Advertising, JWT, Grey, and United Network. The company derived most of its revenue, £4.27 billion, or 41.1% of total 2012 revenue, from Advertising and Media Investment Management. Branding & Identity, Healthcare, and Specialist Communications ranked second with £2.72 billion in 2012 while Consumer Insight contributed £2.46 billion in revenue.

WPP has also paid increasing dividends in the past ten years, from £0.29 per share in 2003 to £1.29 per share in 2012. The payout ratio has also been quite reasonable, fluctuating in the range of 27.1% to 44.1%. In 2012, the payout ratio was 41.1%. The market values WPP at around 9.3 times EV/EBITDA.

Among the three, Omnicom is the highest dividend paying company with a dividend yield of 2.54%, while Interpublic ranked second with a 2% dividend yield. The payout ratio of Interpublic was considered the lowest at only 28%. WPP offers the lowest dividend yield at 1.60%.

My Foolish take

As three companies account for the majority of the global market in the advertising and marketing industry. Investors might consider purchasing all three stocks for their long-term portfolios. In addition, with consistently increasing dividend payments and reasonable payout ratios, investors get a constant reliable income stream from these three stocks.

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