At 67p, are ITV shares about to take off?

ITV shares have been among the biggest fallers in the FTSE 100 over the last year. Roland Head explains why he thinks the market has got it wrong.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Arrow symbol glowing amid black arrow symbols on black background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

As I write, ITV (LSE: ITV) shares are trading at 67p. Its share price has now fallen by 45% over the last year, despite a strong trading recovery in 2021.

The market just doesn’t seem to like ITV at the moment. The television group’s shares trade on just five times forecast earnings, with a whopping 7.5% dividend yield. I think this is far too cheap and have added ITV to my portfolio. Here’s why.

Progress on track

In 2021, ITV reported record revenue of £3.5bn and a strong recovery in profit. Progress continued during the first quarter, with revenue up 18% at £834m, compared to the same period last year.

The company said progress in the ITV Studios business was particularly strong, with revenue up 23% to £458m. Studios produces programmes for ITV and other television groups, including the big streamers.

Meanwhile, advertising revenue from the group’s broadcast and streaming operations continued to recover and was 16% higher than during Q1 last year.

Overall, ITV’s performance so far this year appears to be on track.

Why are ITV shares so cheap?

Of course, there are some risks here. In the short term, advertising revenue in May and June is expected to be below last year’s levels, due to the boost from the Euro 2021 football tournament.

However, advertising revenue for the first half of the year is still expected to be 7% higher than in pre-pandemic 2019, so I’m not too worried about this.

I think what’s really spooking investors is ITV’s decision to invest in an upgraded streaming service, ITVX, to replace its Hub and BritBox offerings. ITVX will be available as a free, ad-funded service, but there will also be an ad-free subscription option.

When ITVX was announced in March, ITV’s shares fell 30%. I suspect investors are worried that ITVX could be an expensive project that doesn’t generate much extra profit. That’s a risk. But in my view, it’s a necessary risk.

A big technology upgrade?

The way I see it, ITV’s strategy is partly just a technology upgrade. Increasingly, we don’t watch television through an aerial, we stream it. Speaking personally, our household TV aerial stopped working a couple of years ago. We haven’t bothered replacing it.

Similarly, Sky now offers a streaming version of its satellite service. Who will want a satellite dish, when they can get the same service over broadband?

To be fair, I would be worried if ITV was trying to go head-to-head with streamers like Netflix. But it’s not. While ITV does have an international subscription business, its main focus is still the domestic UK market.

ITV has a 35% share of UK commercial television viewing. In my view, the group’s ITVX strategy is designed to protect this market share while also attracting new viewers from overseas.

Financially, the plan looks manageable to me. ITV’s debt levels are quite low and operating profit margins are expected to remain healthy, at around 20%.

ITV’s forecast dividend yield of 7.5% looks safe to me and I believe its shares are too cheap. I plan to keep holding. I think its shares should perform well if the company can deliver on its plans.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has positions in ITV. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

ISA Individual Savings Account
Investing Articles

How to build a Stocks and Shares ISA with a 6% dividend yield

It’s easy to build an investment portfolio with a high dividend yield today. But investors need to manage risk carefully,…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

How risky is switching from cash savings to a Stocks and Shares ISA?

The UK government is making moves to encourage cash savers to consider investing via Stocks and Shares ISAs. But what…

Read more »

Friends and sisters exploring the outdoors together in Cornwall. They are standing with their arms around each other at the coast.
Investing Articles

4,985 shares of this FTSE dividend star pay an income equal to the State Pension!

Zaven Boyrazian calculates how many shares investors would have to buy to generate enough income to match the UK State…

Read more »

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

£500 buys me 407 shares in this 8.2%-yielding income stock!

Got a small lump sum? Zaven Boyrazian explores one underappreciated income stock offering an enormous yield that could be set…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

Up 23% this year, is it too late to buy shares in this FTSE 100 compounder?

Having missed Diploma shares at £36 back in April, is a strong trading update with higher guidance a good enough…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

Does this ex-penny stock have the potential to almost double?

This under-the-radar mining stock has doubled in the last 12 months, lifting it out of penny stock territory. But could…

Read more »

A mature adult sitting by a fireplace in a living room at home. She is wearing a yellow cardigan and spectacles.
Investing Articles

£5k in savings? Here’s how that can unlock a £255 monthly second income

Ever wondered how to turn a lump sum of savings into a chunky second income? Zaven Boyrazian explains a simple…

Read more »

British pound data
Investing Articles

Get ready for a US stock market crash?

Experts are waving the red flag on the US stock market and economy, warning of an impending crash. Should investors…

Read more »