FTSE 250 broadcaster ITV (LSE: ITV) paid a total dividend in 2023 of 5p a share. On the current 80p share price, it gives a yield of 6.3%. This is nearly double the index’s present average yield of 3.3%.
So, £11,000 (the average UK savings amount) invested in the stock would generate dividends of £693 in the first year.
Over 10 years on the same average yield, the payments would rise to £6,930, and after 30 years to £20,790.
Crucially, a much better return could be made if the dividends paid were used to buy more ITV shares.
The dividend compounding miracle
By doing this (‘dividend compounding’), the dividend payouts after 10 years would be £9,620, not £6,930. And given the same average 6.3% yield, this would increase to £61,454 after 30 years rather than £20,790!
Adding in the initial £11,000 would give a total investment in ITV stock worth £72,454 by that point. It would pay £4,565 in dividends a year by then, or £380 a month!
Additionally positive here is that analysts forecast the yield will rise to 6.5% in 2025 and 6.8% in 2026.
Are the shares undervalued?
Much of the shine from these payments would be removed if the share price lost value over the period.
The main risk for ITV here is the very high degree of competition in its broadcast media sector, I think. This comes from traditional terrestrial firms looking to make the switch into streaming services and from already well-established companies in that space.
To try to mitigate the chance of a sustained share price loss in any stock I buy, I look for companies that appear underpriced.
Judging from some key valuation metrics I rely on, this looks to be the case with ITV.
On the key price-to-earnings ratio (P/E), for example, it currently trades at 7.3. This is cheap compared to the 13.9 average P/E of its competitors.
To establish exactly how cheap it is, I ran a discounted cash flow analysis.
This shows ITV to be 70% undervalued at its present price of 80p a share, implying a fair value of £2.67.
It may go higher or lower than that, given the vagaries of the market, of course. Nonetheless, such a discount highlights to me that it is one of the biggest bargains in the FTSE 250.
Will I buy the shares?
I already hold several stocks that deliver me an annual yield of well over 7%, so I have no need for another. These core high-yield stocks include M&G, Phoenix Group Holdings, Legal & General, and abrdn.
That said, if I wanted a UK holding in the media sector, it would be ITV. Its ITVX streaming service in particular looks like it could continue to expand in the coming years to me.
Positively in this regard, H1 saw its advertising revenues jump 17% over H1. The same rate of increase was seen in its monthly active user numbers, and streaming hours rose 15%.
