The ITV (LSE:ITV) share price has plummeted by almost 40% since the start of 2022, sending its dividend yield to its highest level in years. Yet, following its latest results, the film & TV broadcasting business has finally started moving back in the right direction, jumping almost 30% since the start of the month.
What’s going on with this stock? And is the high yield a rare buying opportunity, or a trap? Let’s explore.
Strategic progress
Shares of ITV were hit hard by investors on the back of management’s plan to invest billions in creating new content for its ITVX platform. Streaming businesses that create original content are notoriously capital-intensive. And the news didn’t bode well for investors to also admit a crunchdown on advertising income on which ITV is dependent.
However, its 2023 full-year earnings report seems to indicate management made the right decision. Following the hit success of Mr Bates vs The Post Office, ITV just recorded its highest revenue in the history of the business. Meanwhile, with other shows such as Fool Me Once and Love Island proving popular, its studio’s business seems to be firing on all cylinders right now.
In another surprising turn of development, management has also been far more prolific with cost savings than initially anticipated. The firm outlined plans to achieve £150m in annualised savings by 2026 back in 2019. As of 2024, £130m of this goal has already been achieved, and management has revised the timeline to 2025.
These endeavours have, subsequently, raised the firm’s underlying margins ahead of the industry average. And with further titles in the pipeline, the continued success of the firm’s studios business bodes well for shareholders.
What’s going on with advertising?
As a free-to-watch service, ITV is highly dependent on advertising income. Unfortunately, this is where the blemish on its earnings report comes into focus. As a result of the current economic landscape, finding customers willing to spend lots of cash on marketing campaigns is proving challenging. So much so that the firm’s advertising income actually dropped by 15%.
When paired with the capital investments made into content, its earnings per share tumbled from 10.7p to 5.2p – a 50% slide. This downturn wasn’t a major surprise, given management had previously issued a profit warning on the matter. But continued weakness within the British economy could derail the group’s goal of reaching £750m in digital revenue by 2026.
The bottom line
Despite the hiccups in advertising, management’s long-term strategy appears to be intact. And with the firm launching a £235m share buyback programme, it signals that shares look cheap.
All things considered, the cash-generative nature of this enterprise positions it nicely as a source of passive income. While there’s no denying the group’s dividend yield carries risk and volatility, its current valuation looks like a buying opportunity, in my eyes. And given the recent stock price rally, it seems other investors are starting to agree.
Therefore, yes, I believe ITV shares could make a fine long-term addition to my portfolio. But I’m not buying for now as I have other targets in my sights. If I had more cash though, I might.
