There’s no doubt that ITV (LSE: ITV) shares have been firmly out of favour for some time, losing 30% of their value between 2015’s high point and the end of 2018. And looking back further, the price crashed by more than 50% in the three years from the end of 2015.
But since the start of 2019, ITV shares have pulled back a little with a gain of 14%. Admittedly that’s only a single percentage point above the FTSE 100‘s 13%, but the rot appears to have stopped, at least for now.
Low valuation
Where does that leave us? The long-term fall has dropped ITV shares to P/E multiples of 9.7, based on 2019 forecasts, and 9.0 a year later, with forecast dividend yields push as high as 6.4% and 6.7%, respectively.
Those dividends would be around 1.7 times covered by earnings, which is a significant squeeze from a cover level of 2.3 times in 2016, before ITV’s earnings decline hit. But with EPS expected to tick back upwards in 2020, albeit only by a modest 5%, is ITV back on track and are those dividends safe?
ITV reported a strong operational performance in 2018, which saw a 3% rise in revenue — including a 1% rise in previously-troubled ad revenue, driven by a 36% boost in online advertising. Overall adjusted EPS dipped by 4%, but that was largely in line with expectations, and the dividend was lifted from 7.8p per share to 8p
Debt
Net debt did grow, by £15m to £927m, and that’s one of my big bugbears. Debt stood at 1.1 times EBITDA, which is a level that’s generally not considered problematic — but I do get a bit twitchy when I see dividends being raised while cover is falling and a company’s debt level is on the up.
Some might see it as a sign of management confidence in the dividend, and I suspect that’s the case with ITV. But so many times with other companies, I’ve seen it turn out to be misplaced bravado, or a simple failure to recognise the facts.
We also do need to understand that 2018’s fall in earnings happened despite last summer’s World Cup boost, and there’s a comparative 12% drop forecast for this year.
Upside
With my doom and gloom out of the way, it’s time for my upside take. The company has issued an upbeat outlook, and it’s not just in the glib terms we often hear from other companies.
Claims include that “ITV Studios will deliver good organic revenue growth, with £100m more revenue secured at this point than last year,” and “we will maintain a robust balance sheet and deliver on our full-year dividend commitment of at least 8p per share.”
My bottom line is that I really do think the recent tough times are over for ITV. The firm’s commitment to its dividend seems genuine and justified, and I’m becoming more and more convinced the shares are a notable bargain.
Today’s 6.4% dividend yield would be enough to double an investment in just over 11 years, and I really do expect to see a share price recovery to 170p and beyond. ITV has made it on to my personal list of buy candidates.
