A 6.7% yield but down 15%, is it time for investors to consider this FTSE 250 media star?
FTSE 250 terrestrial and digital media giant ITV (LSE: ITV) is down 15% from its 25 July one-year traded high of 88p. This could mean it is a bargain now. Or it may be that the firm is fundamentally worth less than it was before.
To find out which it is, I took a deep dive into the business and ran the key numbers.
Business fundamentals
Earnings growth is what powers any firmâs stock price and dividends over time. In ITVâs case, analysts forecast its earnings will grow by an average of 8.6% a year to end-2027.
A risk to this is the cut-throat competition in the sector from domestic and international operators alike.
However, its recent results have looked solid to good to me. Full-year 2024 numbers showed adjusted earnings before interest, taxes, depreciation, and amortisation rose 11% year on year to £542m. Adjusted earnings per share jumped 23% to 9.6p.
Meanwhile, net debt dropped 22% to £431m, and statutory operating profit soared 34% to £318m.
Share valuation
A shareâs price and its value are not the same thing, of course. The former is whatever the market will pay at any given time. The latter reflects the true worth of the underlying business fundamentals.
Over time, a stockâs price will converge with its true value, in my experience. This comprises several years as a senior investment bank trader, and decades as a private investor.
I have also found that the optimal way to ascertain any shareâs true value is the discounted cash flow model. This pinpoints the price at which any stock should trade, based on cash flow forecasts for the underlying business.
For ITV, it shows the shares are 70% undervalued at their current 75p price. This means their fair value is £2.50.
Comparisons of key stock measures with its competitors provide further secondary confirmations of this undervaluation.
For example, on the key price-to-sales ratio, ITVâs 0.8 is bottom of its peer group, which averages 1.1. This comprises RTL Group at 0.9, MFE-Mediaforeurope (1), Métropole Télévision (1.2), and Atresmedia Corporación de Medios de Comunicación (1.4).
Passive income flows
Last year, ITV paid a total dividend of 5p, giving a yield of 6.7%. This is nearly double the FTSE 250âs current average of 3.5%.
Analysts forecast the dividend yield will remain the same until the end of 2027 at minimum.
So investors considering a £5,000 holding in ITV would make £19,012 in dividends after 10 years. This includes reinvesting the dividends back into the stock over the period â known as dividend compounding.
On the same basis over 30 years, this would rise to £128,434. At that point, the value of the entire holding would be £148,434 (including the initial £20,000 investment). And that would pay a yearly dividend income of £9,945 by that stage.
My investment view
After turning 50 a while back, I reduced the overall risk profile of my portfolio. This is because I am less willing to wait for stocks â or markets â to recover from any shocks.
In my view, a sub-£1 price for a stock adds extra price volatility to the risk matrix. That said, given ITVâs strong earnings growth prospects, I think it well worth the consideration of other investors whose portfolios it might well suit.
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Simon Watkins has no position in any of the shares mentioned. 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.
