Shares in FTSE 250 broadcaster ITV (LSE: ITV) are down 18% from their 22 July 12-month traded high of 88p.
This has boosted its return to 6.9% as a stock’s yield moves in the opposite direction to its share price. By comparison, the FTSE 250’s average yield is just 3.3%.
Analysts forecast the dividends will rise in 2025 and 2026 to 5.04p and 5.17p, respectively. Therefore, the yields would increase to 7% and 7.2%.
Supercharging passive income
The average UK savings amount is £11,000. So, investors considering using this to invest in ITV shares would make £759 in first-year dividends. On the same 6.9% average yield, this would rise to £7,590 after 10 years and to £22,770 after 30 years.
However, this passive income could be much greater using ‘dividend compounding’.
In ITV’s case, using this common investment technique on the same average yield would produce dividends of £10,888, not £7,590, after 10 years. And after 30 years on the same basis, this would rise to £75,658 rather than £22,770!
Adding in the initial £11,000 investment and the ITV shares could be generating £5,979 a year in passive income by that point. That is, as long as it maintains its yield and the share price does not suffer catastrophic losses.
How does the share price look?
I only buy shares that look undervalued compared to similar stocks. For passive income shares, this reduces the chance of my dividend gains being erased by share price losses should I ever sell them. And conversely, of course, it increases the possibility of my making a profit on share price gains.
My first step in ascertaining whether a share is undervalued is comparing it to other stocks using measurements I trust.
Starting with the price-to-earnings ratio, ITV currently trades at just 6.3. This is bottom of its competitor group, which averages 8.4.
This comprises Métropole Télévision at 6.5, Vivendi at 6.7, MFE-Mediaforeurope at 10, and RTL Group at 10.4.
So, ITV looks very undervalued on this measure..
To work out what this may mean in share price terms, I ran a discounted cash flow valuation using other analysts’ figures and my own.
This shows ITV shares are 68% undervalued at their present 72p price. Therefore, the fair value for them would be £2.25.
They may go lower or higher than that, given the vagaries of the market, of course. But it confirms to me that they seem underpriced.
Will I buy the stock?
A risk here is that the sector in which ITV operates is extremely competitive. This may squeeze its profit margins over time. Another risk is the sub-£1 share price, which increases the effects of price volatility in a stock. Each one-penny drop in ITV’s share price represents nearly 1.4% of its entire value.
However, for an investor at an earlier stage of their investment cycle than me (I am 50+ years old now), this high-yield stock may well be worth considering.
