The most recent results from broadcaster and content producer ITV (LSE: ITV) painted a mixed picture. On the positive side, revenues were up 3% at £3.3bn, driven by growth in the production business, ITV Studios. On the negative side, underlying cash profits (EBITA) fell 10% to £729m.
The struggling shares have been hit hard by a troubling combination of these mixed results, a slowdown in travel industry advertising spend due to the coronavirus and wider concerns about the economy. The dividend though is one bright spot.
The high yield
The shares are yielding a massive 8% – far higher than the FTSE 100 average that is nearer 5%. The falling share price has something to do with this, of course. But so do the challenges ITV faces in growing earnings at a time when traditional advertising revenues are falling.
The dividend is covered over 1.5x by earnings so is sustainable for now. But that cover has been falling year-on-year. That situation that will need to be reversed for investors not to see the dividend slashed at some point.
I think management has made a sensible decision to buy itself time by holding the dividend at its current level. It’s expected that the dividend won’t grow next year either, which is far from ideal. But ITV does need to invest in growth areas.
What’s next
With consumers flocking to streaming services such as Netflix, ITV needs to look beyond its traditional TV advertising for income. ITV is responding by investing in its online offering, ITV Hub, and launching Britbox, a joint venture with the BBC, which is home to a catalogue of British content. Later this year, Britbox will launch in Australia. It’s already available in the US, Canada and UK. This international push shows how serious ITV is about trying to take market share and monetise the content it has.
Another key avenue for growth is ITV Studios. It now makes up just over a third of the business. It’s growing nicely and on track to grow revenues on average by 5% over the next few years. In the most recent results, growth was good, rising by 12% to £1.2bn. That reflects growth across all areas but a particularly strong performance for ITV Studios US and International, which together account for over half of Studios revenues.
Yes, shares in ITV are cheap and high-yielding, but the company does face a number of major challenges. CEO Carolyn McCall did a great job at easyJet, but she now faces an uphill battle to get ITV fighting fit.
Positive updates and further international expansion of Britbox alongside shifting more of the group’s revenue and profit towards ITV Studios will be key, I think, to getting the share price moving upwards.
