Shares in ITV (LON. ITV) (ITV.L) have had a poor run over the last 18 months, declining almost 40%. At the beginning of last year, the stock was trading at around the 260p mark, however, today, ITV shares can be bought for under 160p.
Much of the slide in ITV’s share price has to do with the state of the advertising market, which, thanks to ongoing economic and political uncertainty, is not in great shape at present. Add in the threat of online video streaming services such as Netflix, and a few broker downgrades, and it’s easy to see why investors have bailed on the broadcaster.
However, I’m wondering if the slide in the share price has created a dividend opportunity?
High dividend yield
The fall in the share price has pushed ITV’s dividend yield up significantly, with last year’s dividend payout of 7.2p per share, equating to a trailing yield of a high 4.5% right now.
City analysts expect a dividend payout of 8.2p this year, growth of 14% on last year, which equates to a dividend yield of 5.1% at the current share price. On forecast earnings of 15.6p, dividend coverage is expected to be 1.9 times.
High yields can sometimes signal trouble (look what happened at Provident Financial), however in ITV’s case, I don’t believe the dividend is in any danger of being cut in the near term.
Take a look at ITV’s recent dividend payouts:
Source: Hargreaves Lansdown
There’s several things I like about that table. For a start, regular dividends have grown significantly over the last four years, from 2.6p per share to 7.2p per share. That’s an excellent level of growth, albeit from a low base. Second, dividend coverage has always been healthy. Last year, the dividend coverage ratio was 2.4. Thirdly, ITV has even managed to pay out chunky ‘special’ dividends in each of the last five years. Do you think the company would do that if it had concerns about long-term profitability?
H1 results in July weren’t amazing, with total external revenue falling 3% and adjusted earnings per share declining 9% to 7.7p. Having said that, the company stated that it was “confident in the underlying strength of the business” and hiked the interim dividend by 5%.
The advertising market could remain challenging in the near term, due to economic and political uncertainty, and that’s clearly not ideal for a company like ITV. However, ITV does now generate over 50% of its revenue from sources other than spot advertising, and is seeing decent growth in its international content and online, pay & interactive businesses.
ITV’s share price may continue to slide in the short term, however, on a forward looking P/E ratio of just 10.3, I’m starting to see appeal for long-term dividend investors.
Disclosure: Edward Sheldon, CFA has no holding in ITV.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.