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By lunchtime today (9 July), the WPP (LSE:WPP) share price had plunged 16% after the “creative transformation company” issued a trading update for the first six months (H1) of 2025.
Ominously, the announcement also contained a profit warning. Blaming a “challenging economic backdrop” and “continued macro uncertainty” it said like-for-like revenue less pass-through costs would be 4.2-4.5% lower than in H1 2024. For the full year, it anticipates a 3-5% drop.
As a result, its 2025 operating margin’s now expected to be 50-175 basis points lower than last year. Although not unheard of, such a large drop in the share price of a FTSE 100 company is rare.
But in this instance, is it justified? Let’s take a look.
Not lacking in confidence
As you’d expect from an advertising and marketing agency, WPP’s never short of hyperbole when it comes to talking about itself. For example, it boasts that it uses “the power of creativity to build better futures for our people, planet, clients and communities”.
But during times of economic uncertainty, one of the first things to be cut is a company’s spending on promotion and publicity. Discretionary in nature, these are often seen as an ‘easy’ way of quickly cutting costs.
According to the latest IPA Bellwether Report, UK businesses reduced their marketing budgets during the first quarter of 2025. This was the first overall decline in four years.
Better days
But today’s disappointing announcement by WPP follows a long line of previous setbacks. Over the past five years, its share price has fallen 24%. But this comparison’s misleading. In July 2020, the world was having to cope with Covid-19. Of more relevance, its shares are now changing hands for 63% less than when they reached their post-pandemic high.
Yet the stock’s cheap by historical standards. After today’s drop, it’s trading on nine times 2024 earnings.
In its present form, the company’s been around since 1985. Since then, it’s successfully navigated more difficult times. Also, it has a truly global reach with plenty of blue-chip clients on its books.
Future concerns
However, I’m not sure whether things will improve any time soon. With President Trump’s erratic approach to trade policy — and continued economic uncertainty both at home and abroad — I fear advertising budgets will continue to be squeezed.
And if I’m right, the group’s dividend, which has been maintained at 39.4p for each of the past three years, could come under threat. After this morning’s slump, the stock’s presently yielding over 9%. Experienced investors will know that double-digit yields are rarely sustained for long periods.
But my biggest concern is the impact of artificial intelligence. Although it’s helping the industry transform its offering to clients, I think it also poses something of a threat. Increasingly powerful tools are enabling businesses to design their own advertising and marketing campaigns. Ultimately, this could be a major problem for the group and others in the sector.
For my liking, there’s too much short-term — and long-term — uncertainty surrounding the industry. Therefore, I don’t want to buy any of WPP’s shares.
