I reckon ITV (LSE: ITV) could be a smart play for investors looking to generate a solid stream of passive income. The FTSE 250 constituent has struggled recently. But with that, I see an opportunity.
Giving back
In the last five years, the stock has lost 43.4% of its value. That’s a grim reading for shareholders of the British TV stalwart. However, with its sunken share price comes a handsome 6.8% dividend yield.
That’s double the FTSE 250 average of 3.4%. What’s more, the business has reiterated that it remains “firmly committed to creating shareholder value and applying a disciplined approach to capital allocation”.
We saw this in action most recently as it initiated a £235m share buyback scheme following its sale of BritBox International.
Even after rising 17.9% this year off the back of releasing its 2023 results, the stock is still down 9.6% over the last 12 months. I’m not complaining. It now trades on around 12 times earnings for this year. Looking forward, that’s predicted to fall to below nine in 2025.
Making progress
But I wouldn’t buy a stock for its dividend alone. Dividends are never guaranteed, so investors should adopt a holistic approach when doing their due diligence. Nevertheless, with ITV, I believe it has the potential to perform strongly in the years to come.
That’s largely due to its shift to digital. It’s no secret that the traditional TV advertising market is flagging. This hasn’t been helped by racing inflation, which has seen ITV’s customers cut back on spending. For 2023, linear advertising revenue fell 15%.
As such, the business is now placing more emphasis on other platforms. The most prominent of these are ITV Studios and ITVX. Last year, the former saw a 4% rise to post record revenues, while digital revenues grew 19%.
The business has ambitious plans for both in the years to come. For its Studios business, it’s making good progress towards its organic revenue growth target of 5% per annum to 2026. It’s also on track to deliver at least £750m of digital revenues by the same year. For context, it was £490m last year.
The firm has also undertaken cost-cutting procedures as it vies to boost performance. It has delivered £130m in annualised savings to date and is on track to hit its £150m target in 2025, one year ahead of schedule.
In tandem with that, it has now commenced a new restructuring and efficiency programme aiming to enhance profitability.
Crunching the numbers
Taking ITV’s 6.8% yield, if I were to invest £10,000 in the stock today, in a year I’d earn £680 in passive income. While that’s a welcome amount, I’d ideally want greater returns than that.
One way I could achieve that would be to contribute a small amount of my salary. Let’s say £200 a month. I’d also reinvest all the dividends I receive along the way.
By doing that, after 20 years, I’d have £140,504 in my nest egg. If I then applied the ‘4% drawdown rule’, that would equate to £5,620 a year.
Doing the same over a 30-year period would leave me with £311,045 in my investment pot and £12,456 a year as a second income! That would most definitely go a long way in making my retirement more comfortable.
