Since the start of the year, shares in ITV (LSE: ITV) have fallen by 18%. Clearly, this is hugely disappointing and it means that the media company has underperformed the FTSE 100 by around 17%. However, it’s not the only stock which has fallen heavily in 2016, with Sky (LSE: SKY) and Legal & General (LSE: LGEN) slumping by 18% and 16%, respectively.
The effect of these falls has been to boost all three companies’ yields. However, ITV’s yield remains considerably behind those of its index peers, with it standing at 3.2% versus 3.7% for Sky and 6.5% for Legal & General. As such, many income-seeking investors would quickly decide that ITV lacks income appeal compared to Sky and Legal & General and would therefore decide to purchase the latter two companies.
Think again?
However, ITV could prove to be a star income buy. That’s because it has an excellent track record of increasing earnings in each of the last five years and with the company’s bottom line due to rise by 8% this year and by a further 7% next year, the prospect of rapidly rising dividends is a real one. In fact, with ITV currently paying out just 41% of its net profit as a dividend, it could increase dividends at an even faster rate than profit and still be in a financially sound position.
This contrasts sharply with the situation at Sky, with it forecast to post a fall in profit of 6% next year. While this may prove to be a one-off, Sky’s earnings have fallen by 5% and 2%, respectively, in the last two years and this means that the company’s bottom line growth is arguably less stable than that of ITV. This may give Sky’s management less confidence to raise dividends at a fast pace than is the case for ITV and could mean that the former’s dividend growth is slower than that of the latter.
Of course, Legal & General’s income appeal is significantly greater than that of ITV. Even if Legal & General were to maintain dividends at their current level over the medium term, the fact that its yield is double that of ITV means that it will offer a higher income return for a good number of years.
With Legal & General forecast to increase its earnings by 8% this year and by a further 7% next year, it seems to have scope to raise dividends at a brisk pace. Furthermore, with Legal & General having a dividend coverage ratio of around 1.5, it seems to have sufficient headroom when making dividend payments, too.
So, while ITV’s yield may be lower than that of Sky, its earnings prospects are brighter and this means that dividend growth may be higher than that of its media sector peer. Therefore, ITV remains a very appealing income play, although the reality is that Legal & General is the most appealing dividend play of the three by some distance.
