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Does ITV’s 4% dividend yield make the shares a buy now?

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Shares in television group ITV (LSE: ITV) edged higher when markets opened this morning after the company said it will restart dividend payments this year. Management plans to set the payout at 5p per share, giving a forward yield of 4.1%. 

The latest numbers from the group show a strong recovery in advertising revenue and continued growth in programme making. I already own a few ITV shares, but should I be buying more of this stock for my portfolio after today’s news?

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Getting back to normal

ITV’s revenue rose by 27% to £1,548m during the first half of 2021, compared to the same period last year. The group’s adjusted operating profit doubled to £327m.

These numbers look pretty impressive. But the reality is that many UK businesses are performing better this year than they were 12 months ago, as they recover from the impact of the pandemic.

What I want to know is whether ITV is performing better than it was before Covid-19. To find out, I’ve dug out the company’s 2019 income statement. This shows that during the first half of 2019, ITV’s revenue was £1,476m and its adjusted operating profit was £327m.

It looks like ITV’s financial performance has now returned to 2019 levels. I reckon this is early evidence that CEO Carolyn McCall’s ‘More Than TV’ turnaround strategy could be working. But I don’t think it’s a done deal just yet.

What about Netflix?

I don’t watch scheduled television very much any more, and I suspect I’m not alone. The big risk with ITV is that its core broadcast business will become redundant, as viewers switch to streaming services like Netflix. This could send ITV shares into a long-term decline.

ITV is trying to address this risk in two ways. First of all, its ITV Studios business has been expanded. This division makes programmes for ITV and many other channels — including Netflix. Studios looks like a good business to me, but it only generated 30% of profits during the first half of this year.

Most of ITV’s profits still come from advertising sales, which rose 29% to £866m during the first half of the year. As viewing patterns change and more people switch to streaming television, there’s a risk ITV won’t be able to maintain this level of advertising sales.

I think ITV shares could be cheap

I’m encouraged by ITV’s half-year results. Although I can still see some risk ahead, I think today’s numbers show McCall’s making good progress.

Fortunately, I don’t think the stock looks too expensive at the moment. ITV currently trades on around 10 times forecast earnings, with a dividend yield of around 4%.

For a business that enjoys decent profit margins and doesn’t have much debt, I think that looks quite cheap. I also continue to see ITV as a potential takeover target, due to its huge back catalogue of programmes, many of which remain popular.

I’d be happy to buy ITV shares at current levels and intend to keep hold of my shares for now. However, I’ll be watching closely for any sign that the firm’s turnaround progress is slowing.

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Roland Head owns shares of ITV. The Motley Fool UK owns shares of and has recommended Netflix. 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.

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