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With a present (4 July) yield of 6%, I think ITV (LSE:ITV) qualifies as a dividend share. After all, the average for the FTSE 250 is currently 3.62%.
An investment of £10,000 made in July 2020 would have generated dividends of £2,544 over the past five years. However, this period includes the pandemic. With advertising budgets slashed, the broadcaster’s income suffered. To preserve cash, it didn’t pay a dividend in respect of its 2020 financial year.
But those who invested five years ago have also been rewarded with some capital growth. The group’s shares are now worth 15.6% (£1,560) more.
When added to the dividend income, this means the total five-year return has been £4,104, or 9% a year.
A changing landscape
As impressive as this might be, it’s the future that matters. And this is where things could get tricky for ITV.
The company itself acknowledges: “The markets in which we operate are dynamic, highly competitive, and continue to evolve at pace.”
But get it right and the potential’s huge.
The company says the global content market’s worth $233bn. ITV Studios contributed just over £2bn (49%) to the group’s revenue in 2024, so there’s plenty of scope to grow.
And approximately £1.8bn (41%) of turnover came from advertising, which is a small fraction of the estimated £41bn spent by the industry in the UK each year.
Good value
In 2024, the group reported adjusted earnings per share of 9.6p.
This means the stock’s currently trading on a modest 8.7 times profit. The equivalent figure for Netflix is 65 times earnings.
I believe this is evidence that UK shares – including those of fundamentally good businesses (like ITV, in my opinion) – are undervalued when compared to their American cousins.
This has fuelled rumours about a possible takeover. But these stories are as old as the hills proving that it’s never a good idea to buy shares on the basis of speculation.
Adapt to survive
To exploit changing viewing habits, the group’s seeking to earn more from its ITVX streaming platform. And this strategy appears to be working. Its Q1 2025 trading update, it reported a 12% increase in streaming hours and a 15% rise in digital advertising revenue.
However, I think the discount offered by ITV shares reflects investor concerns about the challenges facing the group. The American television giants have deep pockets. Netflix plans to spend $18bn on content in 2025. That’s over four times more than the UK group’s market cap. And this makes me fearful.
But I think ITV’s biggest problem is that it can no longer rely on younger people to watch its output. It claims to reach 25% of the UK’s 16-34 year-olds each week. In contrast, around half of Netflix’s audience is aged 18-34.
Don’t get me wrong, I like ITV – it’s well-managed, makes some great programmes and has a good reputation. But I believe it’s in long-term decline, albeit a very slow one. Its earnings (and its dividend) are likely to come under pressure as advertisers follow the viewers and switch to other platforms. Therefore, I think its share price is likely to stagnate as we move towards the end of the decade.
On this basis, as tempting as the stock’s present yield might be, I think there are better opportunities elsewhere.
