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FTSE 250 terrestrial and digital media firm ITV (LSE: ITV) looks highly undervalued to me. It also delivers an annual dividend yield of over 6%, although this could go down as well as up.
By my reckoning, this means investors could bank major passive income returns while waiting for any price rise.
To me then, there are two key questions. First, what is the stock’s true worth? And second, does the dividend yield look sustainable?
Fair value?
The best way I have found to ascertain any share’s fair 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.
In ITV’s case, it shows the shares are 69% undervalued at their current 82p price.
Therefore, their fair value is £2.65.
This is important because all asset prices tend to trade to their fair value over time. So, it is in this price-value gap that investors can make big long-term profits.
Sustainable dividends?
A share’s dividend yield moves in the opposite direction to its price.
Last year, ITV paid a total dividend of 5p. This gives a dividend yield on the present 82p share price of 6.1%.
Analysts forecast that the payout will stay at this level this year, producing the same yield.
For 2026 and 2027, they forecast a slight drop to 4.9p, giving a dividend yield of 6%.
Key driver for price and dividends
The engine for rises in any firm’s share price and dividends over time is earnings growth. The key risk for ITV is a failure to balance the two primary forces at play in its sector.
These are an ongoing decline in traditional broadcast advertising, and costs associated with increased digital media presence. If ITV can keep expanding in the latter to offset the former, then its earnings could falter.
That said, analysts project that its earnings will grow by an average annual rate of 6.3% to end-2027.
In this context, its 2024 results released on 6 March saw group adjusted earnings before interest, taxes, and amortisation rise 11% year on year to £542m. This was driven by record profits in ITV Studios and growth in Media & Entertainment margins.
Moreover, digital ITVX offering saw viewing up 12% and digital advertising revenue 15% higher. It also made £60m of permanent savings, £10m ahead of plan.
Dividend income potential?
Investors considering a £20,000 holding in ITV would make £16,752 in dividends after 10 years on a 6.1% yield. This also includes ‘dividend compounding’ being utilised.
On the same basis, the payouts would rise to £104,101 after 30 years.
The total value of the holding (including the £20,000 initial investment) would be £124,101 at that point.
And that would deliver an annual dividend income of £7,570 by then! But of course, that cannot be counted upon as dividend payouts and company profits can change over such a long timescale.
My investment view
I already have several high-yielding stocks that look very undervalued as well. Consequently, ITV is not for me now, but I would consider it if any of the others stopped performing well.
And with its 69% undervaluation and 6.1% forecast yield, I think it well worth the consideration of other investors.
