ITV shares look cheap and offer a 6% dividend yield

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Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
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Over the last two years, ITV (LSE: ITV) shares have come down in price significantly. As a result, they now trade at a low valuation and sport a 6% dividend yield.

Is this a great opportunity for investors? Let’s discuss.

Value on offer?

From a value investing perspective, ITV shares do look quite interesting right now, in my view.

This year, analysts expect the group to generate earnings per share of 8.9p. At today’s share price, that puts the stock on a price-to-earnings (P/E) ratio of just 9.1. That’s well below the FTSE 350 average.

Meanwhile, the shares look interesting from an income investing perspective too.

Currently, the median dividend yield across the FTSE 350 index is around 4%. So the prospective yield on offer here is high on a relative basis.

It’s worth noting that at this stage, the projected dividend payout for 2023 (4.8p per share) is expected to be comfortably covered by earnings.

Cheap for a reason?

Of course, cheap stocks are often cheap for a reason. And that appears to be the case here. At present, there are a number of issues that are creating uncertainty.

One is the current business environment. While ITV now has a diversified business model, it still generates a large chunk of its revenues from advertising. And in a weak economic environment – like we have now – companies spend less on this.

Given the weak backdrop, City analysts don’t expect any revenue growth at all from ITV this year. And they expect net profit to fall by around 18%.

But business conditions should improve at some point. However, they could get worse before they get better. A deterioration from here could potentially send the ITV share price lower.

Another major issue is competition from streaming companies such as Netflix, Disney, and Amazon Prime.

Recently, ITV launched ITVX, an ad-funded platform with a subscription-funded, ad-free premium tier. According to the company, it has received “a very positive reception from viewers and advertisers alike”. In its first two months, it attracted 1.5m new registrations.

However, it’s very early days here. And it remains to be seen as to whether the platform can really compete with the major players in the streaming world.

Worth buying?

So the way I see it anyone buying ITV shares today is making a bet on two key things.

Firstly, that economic conditions and advertising spending pick up from here. And secondly, that ITV’s streaming platform continues to gain traction and becomes a force in the streaming world.

Personally, I’m relatively optimistic that advertising spending will pick up at some stage in the not-too-distant future.

However, I’m not totally convinced that ITVX is capable of competing with the bigger platforms.

As a result, I don’t see the stock as a ‘strong buy’ today. To my mind, there are better investment opportunities out there right now.

The post ITV shares look cheap and offer a 6% dividend yield appeared first on The Motley Fool UK.

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Edward Sheldon has positions in The Motley Fool UK has recommended and ITV. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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.

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