Shares in FTSE 250 broadcaster ITV (LSE: ITV) fell 13% on 7 November when it released its nine-month and Q3 results.
This is an eye-catching drop that tends to be good for newspaper headlines. However, in my view, it reflects more the sub-£1 price of the stock than any signal of disaster to come.
That said, it is important to remember when buying such a stock that each penny represents a high percentage of its value. On this basis, more price volatility risk is inherent in such a share than in a higher-priced stock.
The results don’t look that bad to me
The reality of the results was that its nine-month revenue fell to £2.74bn from £2.98bn year on year. However, the company had already flagged earlier this year that such a decline would happen. This was mainly attributable to £80m of income being delayed from 2024 to 2025 because of the 2023 US writers’ and actors’ strikes.
Despite this, there were several positive factors in the numbers for me. For a start, the firm said ITV Studios remains on track to generate record earnings for the full year. It also projects that this will be achieved at a margin of 13%-15%. And it added that ITV Studios is expected to achieve organic revenue growth of 5% a year to end-2026.
Positive as well for me is that its ITVX digital streaming business continued to perform strongly. It saw 14% growth in streaming hours and 15% growth in digital advertising revenue over the nine-month reporting period.
A key risk to these growth figures in my view is the cut-throat competition in the sector. Another is further unexpected events in the entertainment industry, such as another writers’ and actors’ strike.
A big dividend yield on offer
In 2023, ITV paid a dividend of 5p, which yields 8% on the current 62p share price. Analysts forecast that the same will be paid this year and next year and will rise to 5.18p in 2026. The latter would push the yield to 8.4% on the present share price.
So, £10,000 invested in 8%-yielding ITV shares would generate £12,196 in payouts after 10 years if the dividends were ‘compounded’.
Over 30 years on the same basis, this would rise to £99,357. By then the total holding valued at £109,357 would pay £8,749 a year in dividend income.
Will I buy the stock?
The forecast yield is very tempting for me, as I focus on stocks that pay a 7%+ return. I aim to increasingly live off the dividends while reducing my weekly workload.
Additionally, the shares look 76% undervalued to me on a discounted cash flow basis. This implies a fair value for the stock of £2.58, although they might go higher or lower than that, given market unpredictability.
This level of under-pricing reduces the chance of any dividend gains being erased by share price losses, in my experience. And it increases the chance of a profit being made over time on a share price rise.
That said, aged over 50 now I avoid stocks priced under £1, given the greater risk-per-penny involved than higher-priced shares. However, if I were at an earlier stage of the investment cycle, I would buy ITV shares very soon.
