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Lately, investors in ITV (LSE: ITV) have had more reason for cheer than in a while. The FTSE 250 broadcaster issued a decent set of annual results this month, helping push the ITV share price up.
Indeed, it now stands 9% above where it began the year and over five years has increased by more than a quarter.
Still, the long-term picture has been less attractive, to put it mildly.
Over the past decade or so, ITV has lost more than two-thirds of its value.
That means that it now trades on a price-to-earnings ratio of under eight.
The share also offers a dividend yield north of 6%.
In the results, ITV’s management retained its commitment to an annual dividend of at least 5p per share and also said there are prospects for growth in the payout over the medium term. Dividends, though, are never guaranteed to last at any company.
That makes the broadcaster sound like a potential bargain for an investor to consider for their portfolio. Is it?
ITV operates in a rapidly evolving marketplace
Only time will tell.
The past decade’s share price performance has, however, been instructive when it comes to understanding why some investors continue to have doubts about the long-term investment case here.
A decade or two back, legacy television was a far bigger force than today – with few broadcasters on the scale of ITV. Advertising spending was more heavily skewed towards television than it is now. Social media is a much more important part of most advertisers’ marketing spending than it used to be.
That sounds like a license to print money – and for a long time it was.
In fairness, the FTSE 250 firm remains solidly profitable. But what has haunted its investment case and share price is the rise of digital media.
That could be bad for ITV in two key ways.
It means traditional television may attract less ad money than it used to. It also leads to a more fragmented viewing landscape, where instead of a handful of rivals, any part-time content creator with a phone can effectively steal viewers away from old-school broadcasters like ITV.
All is not lost
ITV, with a strong brand, decades of experience, and lots of know how, has not been standing still in the face of such threats.
It has been focused on ramping up digital output, while milking the cash cow of legacy television. Digital viewing on its platform grew 12% last year and digital ad revenue was up by 15%.
It also has a sizeable production business, meaning that the growing number of content providers actually works to its commercial advantage. It can rent them studio space and help produce content.
If it can keep growing the digital business while generating big ad revenues from its legacy business, I think the ITV share price could potentially be a bargain.
But its long-term decline points to ongoing uncertainty about how viable such a strategy is.
What happens, for example, when legacy television viewing gets to a point where its economics become far less favourable than now? The FTSE 250 share may be a bargain in the end, but I think it reflects risks imposed by a fast-changing media landscape. Not all investors will be comfortable with such risks.
