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Here’s a dirt-cheap FTSE 250 stock with a 7% dividend yield!

Black woman using loudspeaker to be heard
Black woman using loudspeaker to be heard

With the stock market correction sending most FTSE 250 shares plummeting, high dividend yields are seemingly everywhere. But that doesn’t mean they are all sustainable.

While panic selling is undoubtedly playing a role in the collapse of valuations, there are some valid causes for concern. After all, inflation and rising interest rates are having a significant impact on profit margins which, in turn, places pressure on dividends.

Yet in the case of ITV (LSE:ITV), its near-40% 12-month share price decline is actually caused by a different catalyst altogether. And there’s a good chance things aren’t as disastrous as most investors seem to think.

The fall of the ITV share price

As video streaming continues to steal market share from traditional television, companies like ITV have had to adapt their business models. The core of the group’s income continues to stem from selling advertisement slots. But management’s focus is shifting towards online with the newly-launched streaming service ITVX.

The move seems prudent, given the changing landscape. So why have shareholders been seemingly running for the exit this year?

The problems started back in March when shares collapsed by 27% in a single day, sending the dividend yield to just under 7% in the process. This massive spike in volatility came after the company laid out its revised long-term strategy that included a £1.23bn-£1.35bn annual spend on creating new content.

High content costs aren’t exactly uncommon within the streaming industry. But it seems investors have little faith that ITV can deliver high-quality shows that will resonate with viewers. And it’s not entirely unjustified. Over the last five years, investments in new content have been steadily rising. Yet profits from its Studios division have been fairly patchy.

Is the dividend yield sustainable?

Suppose ITV’s content planning team cannot identify what’s tickling viewers’ taste buds? In that case, investing more than a £1bn each year into new content is the equivalent of setting money on fire. Yet the company isn’t without success.

The group has a long list of hit shows. And these previous successes are why ITV is the largest ad-funded streaming platform in Europe today. Assuming it can deliver on its goals, online revenue growth is expected double, eventually reaching £750m in 2026.

What’s more, so far, things appear to be on track. According to its latest quarterly results, digital revenue for the first six months of 2022 came in at £276m, growing by 15% compared to a year ago. And with operating profits rising alongside, dividend payments have resumed after a two-year sabbatical, courtesy of the pandemic.

Whether the firm’s currently impressive yield can be sustained moving forward seems largely dependent on the success of ITVX. The new strategy is still in the early days of execution. But the initial results look promising. And if ITV can continue delivering solid progress moving forward, its cash flow and, in turn, dividend yield, could be getting further bolstered.

There’s undoubtedly a high level of uncertainty surrounding ITV and its share price. However, the potential returns in both income and capital gains make it a leap that some long-term investors might want to consider. Even more so, considering the P/E ratio today stands at a cheap-looking 6.3 times.

The post Here’s a dirt-cheap FTSE 250 stock with a 7% dividend yield! appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022