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Should I invest in advertising companies?

One of my favorite shows is Mad Men. The story depicts life in an advertising agency in Manhattan in the 1960's. I was intrigued by the portrayal of the advertising business, since it involved maintaining client relationships for long periods of time if successful. I also wanted to look for ideas beyond the usual investment targets.

Advertising agencies have a very interesting business model. Businesses have to advertise their products or services, even during a recession. The business of advertising agencies is not characterized by heavy capital investment, typical to most other professional service organizations. However, because few of the companies have raised dividends for at least ten years in a row, they are not found on typical dividend growth screens.

The market is dominated by a few large players such as Omnicom, Publicis, WPP, Interpublic. Unfortunately, none of them has a history of regularly raising dividends.

WPP plc (WPPGY) provides communications services worldwide. The company seems to have frozen its dividend in 2009, which ended its streak of consecutive dividend increases. WPP was dropped from the list of international dividend achievers after the dividend freeze of 2009, although it would likely be added back in 2014 if it maintains a five year streak of dividend increases. I reviewed the company site, and could find raises starting in 1995. This is the advertising company I would likely consider for inclusion in my dividend portfolio if it trades at attractive valuations.

Currently, the stock is slightly overvalued at 20.90 times earnings and yields approximately 2.30%. I would need to research the company in more detail and analyze it, before I initiate a position in it, but I usually require at least a 2.50% entry yield coupled with a P/E ratio below 20. The company might not end up delivering dividend growth every year, but over time, I expect it to grow dividends above the rate of inflation.

Omnicom Group Inc. (OMC), together with its subsidiaries, provides advertising, marketing, and corporate communications services in the Americas, Europe, the Middle East, Africa, and the Asia pacific. While the company has not raised dividends every year, over the past decade it has managed to quadruple the quarterly payment from 10 to 40 cents/share. When I initially started researching the basics of the advertising companies, I found Omnicom to be a company I would consider owning one day. Unfortunately, with the announced merger with french company Publicis (PUBGY),  there are some changes to take into account. It looks as if the new company will be based in the Netherlands, which could pose issues for dividend investors from a tax withholding standpoint. In addition, companies that merge might lose focus on their brands, as Interpublic did in late 1990's. I also do not like the fact that the combined Omnicom/Publicis will have both Coca-Cola and PepsiCo as clients. I am not sure if these clients would be happy if their business is handled by the same advertising agency. Currently, Omnicom trades at 17.70 times earnings and yields 2.50%.

The third advertising company I reviewed was Interpublic (IPG), which provides marketing and advertising solutions worldwide. While it does not have a consistent history of raising dividends, the company could well be an acquisition target itself. The company went on a major acquisition spree in the late 1990's, lost focus, and eventually cut dividends in the early 2000's. It reinstated it a few years ago, and currently trades at 18.90 times earnings and yields 1.80%. Warren Buffett used to be a shareholder in Interpublic between the bear market in 1972 - 1974 and the mid 1980's.

Full Disclosure: Long KO and PEP

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