The share price of broadcaster ITV (LSE: ITV) has plummeted by around 37% over the last 12 months as the company has been sounding cautious over future growth. This leads to the inevitable question: could the shares now be too cheap?
The share price is now at its lowest for about seven years and clearly in itself that’s not a reason to buy the shares, but it does give a starting point for thinking about just how lowly rated the broadcaster has become. The P/E ratio of around seven is another indicator of just how cheaply the shares are trading, despite numerous positives such as ITV having its own on-demand services and the ongoing commercial success of ITV Studios.
To me, this P/E is out of step with the potential for the broadcaster and when the dividend yield is added in, it really does look like ITV could offer a lot to brave investors. The yield is currently around 7.5%, so there’s a nice combination of a low P/E and a high yield – a combination I personally like to see. The caveat to this is that a low P/E and a high yield need to be thoroughly researched before buying, in case the company is in a permanent decline, like Carillion was, for example.
From my point of view, ITV is in a position where improvement is entirely achievable. When it comes to the dividend, the cover is just below two, meaning the chances of an imminent cut seems unlikely. It also makes me think management is running the company sustainably, sensibly and with a long-term view, which is a reassuring sign for any investor.
A track record to be proud of
From 2011 to 2018, the broadcaster’s dividend increased from 1.6p to 8p and although the rate of growth has slowed in the last year, it nonetheless shows the company has a track record of looking after investors.
The opportunity for recovery largely revolves around ITV Studios and providing more content that goes direct-to-consumer, both of which will take pressure off the more lumpy advertising revenues that the business still largely relies upon. Given the company has spent £2.37bn on acquisitions, largely to support the growth of content, investors will be expecting to see ITV Studios continue to play a growing role in helping the firm profit from producing rather than just advertising.
If the past is anything to go by, the signs look good for ITV Studios because its total revenue grew 6% to £1,670m, including an unfavourable currency impact of £11 million, in 2018. For 2019, the broadcaster expects ITV Studios to deliver good organic revenue growth, with more than £100m revenue having been secured this year versus last year.
Despite the challenges the broadcasting industry faces in the short term from fears of an economic slowdown, plus the threat from Netflix and Amazon as well as Brexit, the share price of ITV has sunk to a point where I have started to buy the shares. From my point of view, the high yield is the main attraction, but additionally, I do not see any reason why the share price should be as low as it is. To me the shares just look too cheap.
Andy Ross owns shares of ITV. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.