Shares in FTSE 250 broadcaster ITV (LSE: ITV) have dropped 11% from their 22 July 12-month high of 88p.
Over and above the broader recent decline in the FTSE 100, much of this fall occurred after the firm’s H1 results.
This seems overdone to me, as it fails to factor in ITV’s strong growth prospects and high dividend yield.
Growth prospects
Perhaps many investors see ITV’s growth prospects as hampered because of the huge competition in the broadcasting sector.
I agree that this is a risk for the firm. Pressure on earnings will come from well-established streaming giants and from terrestrial broadcasting firms looking to diversify as well.
The 2% decrease in ITV’s total external revenue in H1 2024 versus H1 2023 has been highlighted in this regard.
However, the firm explained that it was mainly due to £80 million of revenue being delayed from 2024 to 2025. This was caused by the 2023 US writers’ and actors’ strikes, and that seems reasonable enough to me.
Aside from that, its adjusted EBITA was up 40% in H1, driven by a strong performance from its digital business. In fact, ITVX’s advertising revenues jumped 17%, as did monthly active user numbers, and streaming hours rose 15%.
Good passive income generation
In 2023, ITV’s total dividend was 8p a share, which gives a current yield of 6.4%. This is nearly double the average FTSE 250 yield of 3.3%.
So, £11,000 (the average UK savings amount) invested in ITV shares would make £704 in the first year.
If the yield averaged the same, then after 10 years an extra £7,040 would be made, and after 30 years another £21,120.
A good return certainly, but much more could be made by using the dividends to buy more ITV shares. By doing this – known as ‘dividend compounding’– £9,826 extra would be made after 10 years instead of £7,040. After 30 years, an additional £63,649would have accrued rather than £21,120.
So the total investment would be worth £74,649 by that point, generating £4,778 each year in dividend payouts!
How undervalued is the stock?
A bonus is that the stock looks very cheap indeed at its current price of 78p, in my view.
On the key price-to-earnings (P/E) stock valuation measure it is trading at just 7 compared to its peer group average of 8.8 (although the group includes some on lower P/Es).
It comprises Atresmedia Corporación at 5.5, Métropole Télévision at 6.9, MFE-Mediaforeurope at 10.2, and RTL Group at 12.4.
A discounted cash flow analysis shows ITV to be 72% undervalued at its present price. So, a fair value per share would be £2.79, although they may go lower or higher than that.
Will I buy?
Aged over 50 now, buying a stock under £1 is too risky for my investment time horizon. At 78p, each penny is nearly 1.3% of the share’s entire value.
The unexpected can happen anytime, as was seen with the Covid outbreak. And I simply do not want to have to wait for any stock to recover from a major drop in value, no matter how good it looks.
However, if I were 10 years younger, I would buy ITV shares. I think the firm’s growth prospects are solid, it pays a very good yield, and it looks very undervalued.
