ITV (LSE: ITV) shares have lost over half their value in five years. Consequently, the dividend yield now stands above 8%.
On 25 January, broker Shore Capital rated the FTSE 250 stock a ‘buy’. Its analysts argued that ITV’s production business should benefit as streaming services like Netflix double down on their original content.
So, should I buy ITV shares?
Relevance
One of the first things I consider when deciding whether to invest in a company is relevance. Do consumers still love its products and services? Or is it seemingly going the way of the dodo (Cineworld, Blockbuster, etc.)?
ITV will be 69 years old in September. Does it still have relevance in 2024?
I think it does, yes. Look at Mr Bates vs The Post Office, the recent four-part television drama series made by ITV Studios.
Centring around the real-life scandal of wrongly-convicted Post Office workers, it was very well-received by critics. More importantly, over 1.2m viewers signed a petition calling for justice, which quickly prompted new legislation from the government.
The series brought in 10.9m viewers and was ITV’s biggest new drama in over a decade. It even beat the 2010 launch of Downton Abbey, which is interesting because it was widely assumed such terrestrial hits were a thing of the past.
Within two weeks, the series had reportedly been watched 16.6m times on ITVX, the broadcaster’s streaming platform.
I’d say all this definitely counts as relevance.
A hit factory
While such hit shows will continue to attract advertisements, the overall advertising market remains very weak. As such, management expects full-year 2023 total advertising revenue to be down around 8% versus 2022 (which was strong due to the FIFA World Cup).
Meanwhile, brokers see full-year net profit falling to £324m from £428m in 2022. And not much growth is pencilled in for 2024.
However, by 2026, the firm expects two-thirds of revenue to come from ITV Studios and streaming. It also aims to increase total streaming hours from 737m hours in H1 2023 to 2bn by 2026.
Another positive is ITV Studios, the division that makes content for ITV and sells it to other streamers. It recently produced Fifteen-Love for Amazon Prime and season five of Love Island USA for Peacock. And that’s just the tip of a larger production iceberg.
Given the unfavourable economics of streaming, which involve huge upfront content spending with little certainty of success, I expect more streaming companies to licence ready-made content from hit factories like ITV Studios.
Will I buy shares?
The dividend of approximately 5p per share for 2023 translates into a yield of 8.1%. That payment is forecast to be covered 1.6 times by earnings, which is fairly decent coverage.
Meanwhile, the shares trading at just 7.6 times forecast earnings.
Unfortunately, I’m worried the stock’s cheapness is justified. After all, the company’s net income today is less than it was in 2016. It could decline further due to relentless competition from Netflix, YouTube, Amazon Prime, Disney+, Apple TV, and more.
Crucially, unlike ITV, these companies don’t have to worry about their digital content cannibalising traditional broadcasting services.
I’m a big fan of ITV’s content (I found its Changing Ends hilarious). But given these challenges, I’m not tempted to follow the broker’s buy recommendation.
