ITV (LSE: ITV) shares have experienced a significant pullback recently. A year ago, they were trading near 110p. Today however, they can be snapped up for less than 60p.
Is it worth picking up a few shares for my portfolio at the current share price? Let’s take a look.
ITV shares look cheap
Let’s start with the valuation because this stock is very cheap. At present, analysts expect ITV to generate earnings per share of 13.7p for 2022. That means that at the current share price of 59p, the forward-looking price-to-earnings (P/E) ratio here is just 4.3.
That’s an insanely low P/E ratio, to my mind. At that multiple, ITV is priced like it’s going out of business. I don’t think the broadcaster is likely to go out of business any time soon. This isn’t a company without cash flow (adjusted cash flow was £185m in H1 2022). Nor is it a company with a massive pile of debt (net debt at 30 June was £615m). So there could be some value on offer here right now, assuming earnings hold up (more on this below).
High dividend yield
Turning to the dividend yield, this looks quite attractive. In its H1 results, ITV said that it remains committed to paying a dividend of 5p per share for 2022. At the current share price, that equates to a yield of about 8.5%. That’s a big yield. However, it’s worth noting that ITV has a patchy dividend track record, so this payout, and future distributions, are certainly not guaranteed.
Major challenges
The thing to bear in mind here however, is that ITV is facing a number of challenges right now. For starters, the company is likely to be impacted by the downturn in the UK economy. ITV generates a large chunk of its revenues from advertising and in a downturn, businesses pull back on their ad spend.
Secondly, inflation is likely to increase its costs significantly. In H1, costs in its Studios division jumped 14%. Meanwhile, content costs in its Media & Entertainment division jumped 11%. These rises translate to lower earnings, which impact a company’s share price and ability to pay dividends.
Finally, viewing habits have changed dramatically in recent years. Traditional TV broadcasting is becoming more outdated. Personally, I hardly watch any regular TV these days. Instead, I watch news on YouTube and shows on Netflix and Amazon Prime.
Now ITV is making an effort to focus on streaming. It plans to roll out its new ad-funded streaming service ‘ITVX’ platform this quarter. This will allow viewers to either watch content free of charge with ads, or pay for a subscription service. This platform could boost its revenues. However, there’s no guarantee it will be successful.
My move now
Weighing up risk versus reward here, I’m happy to leave ITV shares on my watchlist for now. The stock does look cheap, so it could experience a bounce at some stage.
However, all things considered, I think there are safer stocks to buy for my portfolio right now.
