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Despite the FTSE 100 reaching record highs in 2025, there are still plenty of large-cap income stocks getting left behind. WPP (LSE:WPP) shares have certainly had a rough time of late, tumbling by over 50% since the start of the year.
That’s obviously frustrating for existing shareholders. But it’s dragged the group’s price-to-earnings ratio down to a dirt cheap 8.2 and elevated the dividend yield all the way to 9.8%! As such, new investors with £5,000 to spare can not only snap up 1,235 shares today, but also unlock a £490 passive income in the process.
So is this a fantastic buying opportunity for income investors? Or is it a yield trap? Let’s explore.
The bear case
As previously mentioned, the collapse of WPP’s share price this year has pushed the yield to near-double-digit territory. As such, the stock now has the highest level of payout in the entire FTSE 100. On paper, that sounds like a lucrative income opportunity. But in practice, it might be a glaring sign to stay away.
The reason why WPP shares have fallen so aggressively stems from the company issuing a series of profit warnings. A lacklustre marketing environment has dampened advertising budgets, reducing demand for WPP’s services. Combining this with increasingly fierce US competition, the firm appears to be simultaneously experiencing market share erosion.
Consequently, dividends are under pressure. While shareholder payouts are still covered by earnings, a continued downward trajectory in profits and cash flow could cause management to rethink its dividend policy. Even more so, given that a new CEO has just been brought on board, who may decide to implement cuts to free up more financial flexibility.
The bull case
Even if dividends take a hit in the short term, they may recover in the long run. That’s because under new leadership, WPP has already announced £150m in annualised savings as part of a restructuring programme. At the same time, the company is investing aggressively in artificial intelligence (AI) to help customers automate the creation and improve the efficiency of marketing campaigns.
This can cannibalise parts of WPP’s existing business, so revenue growth may continue to prove elusive. However, the WPP Open Intelligence AI platform operates at significant higher margins, potentially enabling earnings to expand. And when combined with the planned annual cost savings, dividend coverage could improve, paving the way for payout hikes in the coming years.
The bottom line
All things considered, I think outright writing off WPP as an investment could be a critical mistake. Instead, investors could be well rewarded to keep close tabs on its recovery progress under new leadership.
Right now, the uncertainty’s too high for my tastes. So I’m going to wait and see how the company performs following its restructuring. But if progress starts to translate into wider margins and a recapture of lost market share, then WPP could present an exciting income and growth opportunity for me in the future.
This story originally appeared on Motley Fool
