OMC Pays More Than A Treasury. And It Grows

The market seems to believe this advertising giant is standing still, yet its cash flow is gushing at a rate that puts government bonds to shame.

Omnicom (OMC) is one of the world's largest advertising and marketing firms, a business that lives and breathes brand perception. Yet, trading around $78.60 a share, its own stock has lagged, returning just +10.7% over a year in which the S&P 500 gained +21%. The market is pricing Omnicom like a risky, stagnant business, yet its cash flow yield dwarfs government bonds and its growth is accelerating.

This business pays you more than twice what the U.S. government does.

The choice for any saver is simple arithmetic. You can lend your money to the U.S. government for a decade and earn a 4.6% yield. Or you can, in effect, own a piece of Omnicom, which currently generates a free-cash-flow yield of 12.8%. This isn't a fleeting number driven by a one-time event; the company's three-year average free-cash-flow yield is a durable 9.5%.

Unlike a bond, whose coupon is fixed, this business is growing. Following its large acquisition of competitor Interpublic, trailing twelve-month revenue is up 26%. Some analysis of peer companies, like a recent look at Accenture, also focuses on the power of a durable cash machine. The core of the investment case is that you are paid a high, bond-like yield from the existing business while getting the potential for that payout to grow.

So what is the market afraid of?

A 12.8% yield is not a secret. The market sees it and is pricing in a significant risk. The catch is not in the math, but in the business itself. The Interpublic integration has created a more complex company, and management is now asking investors to focus on its "core operations." These are the segments it believes will drive future growth, after carving out businesses with approximately $3.2 billion of annual revenue slated for disposal.

The concern is what this new focus might obscure. While the company posted organic revenue growth of 3.9% in its most recent quarter, management also noted that its traditional advertising segment was "down in Q1." The market's fear is that the strong "core" performance is masking a foundational decline. If that weakness in the legacy advertising business accelerates, the impressive overall cash flow could be jeopardized. For investors who prefer to own a basket of names in this sector, a communication services ETF like XLC offers broader exposure.

The test is whether 'core operations' can outrun the advertising decline.

The comparison to a government bond only holds if the cash flow stream is secure. For Omnicom, that security depends on the new, combined company successfully generating enough growth to more than offset any weakness in its traditional segments. The company's ability to expand its integrated client relationships will be a key factor in its success.

Investors will get a clear signal when the company reports its next quarterly results on July 28th. The key figure to watch will be the organic growth of those core operations. Another quarter at or above the recent 3.9% would be strong evidence that the new engine is working, and that the bond-beating yield is more durable than the market currently believes.

If cash yield is what draws you, our Covered Call Finder shows the income the stocks you already own could pay, strike by strike.

If You Like The Yield, You Will Like The Discipline

A business out-yielding a Treasury while it grows is a genuinely rare find. But one company's cash flow, unlike a coupon, is never contractual, and a single name can cut that payout the year you need it most.

The Trefis High Quality (HQ) Portfolio is built on exactly the trait you just read about: about 30 companies chosen for consistent cash generation, strong margins, and sturdy balance sheets, spread across sectors, sized and re-balanced with rules. It has a track record of outpacing a benchmark that combines the three major indices - the S&P 500, S&P Mid-cap, and Russell 2000. Keep the cash machines you find; let a diversified set of them carry the long game.