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Today (6 March) has seen a jump in the ITV (LSE: ITV) share price, after the broadcaster unveiled its full-year numbers.
Over the longer term, though, the City has been tuning out the FTSE 250 company’s investment case. The ITV share price has fallen 27% over the past five years.
The price chart does not show the full picture when it comes to investors’ returns.
After all, ITV has a juicy 6.7% dividend yield. The company held the annual dividend per share flat in today’s results and said it expects the same payout for this year, although it anticipates growing the dividend over the medium term.
So, is this a share investors should consider not only for the attractive passive income potential, but also perhaps some capital gains as it starts to get back to its former price level?
Long-term question mark
To some extent, I think the ITV share price chart contains some clues to the answer.
For years, ITV shares have looked cheap. Yet they have generally failed to rise above a certain level before falling again.
Revenue last year fell 3%. That points to some of the longer-term challenges for ITV. Demand for legacy terrestrial services remains substantial but is in structural decline, posing an ongoing threat to advertising revenues.
Meanwhile, digital services can help provide some growth opportunities and indeed digital revenues last year were a substantial £556m. But the market is crowded.
ITV’s studios business, which helps other broadcasters produce and shoot shows, could help. But demand has been weakening and last year, revenue from ITV’s studios division fell 6%.
The question I think investors have been wrestling with for years – and that remains unanswered – is whether this is a cash generative legacy business in genteel decline, or a bargain media company that is successfully pivoting to new areas of opportunity.
Lots of potential
Although revenues declined, earnings per share doubled.
The company benefits from a strong brand, large viewer and subscriber base, unique studio facilities, and substantial cash flows. Last year, for example, it generated £325m of free cash flow. For a company with a market capitalisation of £2.8bn, that is substantial.
In fact, I think ITV has the potential to keep doing well over the medium to long term.
It has adapted its business model for a shifting media landscape while continuing to make profits and generate free cash flow, supporting a generous dividend.
Despite all that, the ITV share price has continued to languish for the most part.
The investment case now is much as it has been for the past several years or more, so I see no immediate reason for it to start climbing back to its old level.
From a long-term perspective, though, I do see it as undervalued and so think investors ought to consider it.
