Like most people, I do love a bargain, especially one that could make me money. Fortunately, I’m in luck because the London Stock Exchange is currently jam-packed with value stocks in all shapes and sizes.
Unfortunately, however, my funds are low after adding quite a lot of shares to my portfolio in recent months. But the good news is my buy-list backlog has largely been cleared now, freeing up space for new ideas.
Here is one FTSE 250 stock that has caught my eye with its low valuation multiple and 7.2% dividend yield.
Reasons to turn off
ITV (LSE: ITV) shares have plunged 58% in five years, leaving the share price at just 69p today. For context, they were at 260p in August 2015.
What on earth has gone wrong here?
Well, the first thing to say is that the broadcaster is dealing with the decline of terrestrial television. According to the media regulator Ofcom, just 54% of young people now watch any live television. Yet even older audiences, who were generally loyal to traditional TV, are now consuming more streamed content.
Worryingly, the number of terrestrial TV programmes pulling in more than 4m viewers has halved since 2014. This mass audience decline limits the broadcaster’s ability to charge big bucks for advertisements. That’s even more the case today, with a weak ad market.
The broadcaster does have its streaming offering, ITVX, but it faces enormous competition. Beyond Netflix, Amazon Prime, and Disney+, there is also TikTok, YouTube, and various gaming platforms. All are competing for eyeballs and subscriptions.
High-quality content
So, why would I even consider going near the stock?
Well, I like that ITVX is growing rapidly and now has 12.5m monthly active users. Management plans to increase that to 20m with £750m of digital revenue by 2026.
Importantly, ITVX already has a solid foundation, with tens of thousands of hours of popular content already available. The challenge will be getting people to upgrade to paid subscriptions over time.
Additionally, the proliferation of streaming services should continue to benefit its Studios division. This is the part of the business that makes productions for third-parties in the UK and internationally. Hit shows include Hell’s Kitchen, Love Island, and Come Dine With Me.
So, while the group’s first-half external revenue fell 2% to £1.6bn, Studios revenue rose 8% to £1.0bn.
I might tune in
ITV shares are dirt-cheap with a P/E ratio of just eight, which reflects the challenges the business faces.
However, the reward for taking on this risk is a 7.2% dividend yield, with the payout covered 1.7 times by anticipated FY23 earnings. Then there’s the potential of a turnaround in the share price.
Of course, neither is guaranteed, but I can’t help thinking the stock might be close to rock bottom in terms of investor sentiment. That is, all negativity seems priced in, and then some.
Finally, I’ll mention the ongoing strikes in Hollywood involving writers and actors. These have put a freeze on the creation of new content in the US. Perhaps ITV will step in and licence its pre-made content to US broadcasters if they need to fill their schedules this autumn.
When I have more cash, I may invest in ITV shares.
