As a veteran value/income/dividend investor, my family portfolio is packed with lowly rated shares that pay big dividends to patient shareholders. My favourite hunting ground for these stocks is the elite FTSE 100 index. However, I’m finding more and more chronically undervalued shares in the FTSE 250.
Value-hunting
My wife and I already own five different mid-cap shares in our latest portfolio — including one recently relegated from the blue-chip index. Also, we sold one of our FTSE 250 holdings earlier this week in order to buy into a better bargain.
In my latest search for deeply discounted mid-cap companies, I spotted this bargain-bin buy, which we already own.
My mid-cap bargain is ITV
Founded in 1955, ITV (LSE: ITV) is the UK’s largest commercial terrestrial broadcaster. However, its engine for growth is the wide-ranging content it produces and sells to media groups worldwide. Alas, a fall in TV advertising spending has hit earnings this year.
ITV shares are down 13.7% over one year and have almost halved over five years, crashing 49.2%. For the record, my wife and I bought ITV shares for 68.8p a share in June 2022.
At first, this stock did rather well, peaking at its 2023 high of 96.62p on 9 February. However, the share price has since tumbled and now stands at 63.36p. This values the firm at £2.6bn.
Thus, we’re nursing a paper loss of 8% of our original investment. That’s hardly ideal, but this decline is largely offset by the cash dividends ITV has paid us over one-and-a-half years.
To date, we’ve received dividends of 1.7p, 3.3p and 1.7p, with 2023’s final dividend to come in May. That comes to 6.7p, almost cancelling out our capital loss. And this cash stream is why we bought the stock in the first place.
Despite facing earnings headwinds, ITV shares still look too cheap to me today. They trade on a multiple of 9.3 times earnings, delivering an earnings yield of 10.7%.
This means that its market-beating cash yield of 7.9% a year is covered under 1.4 times by earnings. That’s not as big a margin of safety as I’d like to see. Then again, there has been no indication from CEO Carolyn McCall that the group will cut its payout in the near future.
What next?
Currently, ITV stock is trading 8.6% above its 2023 low of 58.36p, hit on 1 December. I’m hopeful that this ‘Santa rally’ will continue in 2024, because I see this stock as very undervalued.
What’s more, there could be a powerful pop in the ITV share price if a larger media rival decided to bid for this business. When a bid rumour last emerged 10 months ago, the stock nearly hit £1. While this would be welcome news, it’s only a minor reason for me owning these shares.
What I’m hopeful of is an earnings recovery driven by rising advertising spending in 2024-25. If this doesn’t emerge, then this stock could see further falls. Even so, I’m more interested in seeing where the stock will be five and 10 years from now!
