Omnicom Group Inc. (OMC), Lamar Advertising Co (LAMR): Madison Avenue Meets the Information Superhighway

The advertising industry is smack in the middle of a sea change from traditional advertising media, like TV and radio, to the brave new worlds of digital and social. According to Carat, worldwide advertising spending is expected to increase by 3.7% in the current year and 5% next year. Most importantly, digital advertising is expected to grow by 14.4%, outpacing the overall advertising industry. This changing scenario is forcing a lot of traditional “mad men” to consider a new approach. Here are three advertising companies tacking toward the future by increasing their geographic operations and shifting focus to digital platforms.

Expansion drives future growth

Digital billboards are a new and advanced means of advertising, which display outdoor advertisements on a giant screen, rather than on a traditional billboard, which is painted or papered. Lamar Advertising Co (NASDAQ:LAMR) has 1750 digital billboard units in the U.S., which include 972 bulletins and 778 posters. It plans to install 150 digital billboards by the end of the year, out of which it has already mounted 42 units in the first quarter of this year. Lamar sees growth potential in this segment due to high demand for digital billboards; the company targeted a total capital expenditure of $100 million this year, with 50% of that earmarked for billboard installation. Lamar expects this segment’s revenue to increase to $206.2 million in the current year, up from $170.7 million last year.

On Nov. 16, Lamar Advertising Co (NASDAQ:LAMR) filed a request with the IRS to convert its operations into a real estate investment trust, or REIT. The company expects to pay a one-time charge of $5 million to make the move. If the company converts into a REIT, it will not have to pay corporate income tax. Instead, it will have to distribute a minimum of 90% of its taxable income to its shareholders as dividends.

Lamar was planning to start functioning under the REIT structure in the 2014 tax year, but the IRS recently made some changes to policies regarding real-estate companies that can be converted, so the company has to sort through regulations and tax laws before it can make the switch. Lamar expects to generate EBITDA of $562 million in the next year, which will result in taxes of $58 million. If it converts into a REIT, the company will save on its tax bill and improve its profitability.

Optimistic about the future

Looking at the rising demand of social media marketing, Omnicom Group Inc. (NYSE:OMC) signed a deal with salesforce.com, inc. (NYSE:CRM). With the help of this deal, it will use Salesforce’s marketing cloud services for its social media marketing offerings. This deal will help the company make better social media offerings, using Salesforce’s expertise. The salesforce.com, inc. (NYSE:CRM) deal is unlikely to be exclusive, but this is the first deal of this kind that Omnicom has ever struck. Omnicom Group Inc. (NYSE:OMC) has a strong record of gaining contracts; this deal will incentivize its existing customers to stay with Omnicom for their social media marketing strategies. It is expected this deal will help the company to attain total organic growth of around 3.2% in this year.

In the last 10 years, Omnicom Group Inc. (NYSE:OMC) has distributed 99% of its net income to its shareholders in the forms of dividends and repurchases. Recently, it declared a dividend of $0.40 per share in the second quarter, which will be payable on July 11, 2013. This dividend is an increase from $0.30 per share in the first quarter of last year. In the first quarter, Omnicom Group Inc. (NYSE:OMC) generated a free cash flow of $303.1 million. At the end of the first quarter, the company had cash and short term investments of $2.09 billion. With rising revenue opportunities, the company will soon generate increasing cash flow that will help it maintain its dividend payout ratio of 35.20%.