Since late 2021, I have repeatedly argued that UK shares look far too cheap, especially when compared to their foreign counterparts. As a result, my wife and I have built a new family portfolio packed with undervalued FTSE 100 and FTSE 250 stocks.
FTSE flops
Despite its relative cheapness, the Footsie has been a flop over the past year. In fact, it’s actually down 3% in the last 12 months. It’s a similar story for the FTSE 250, which has dipped 1.8% in a year.
Meanwhile, the US S&P 500 index has soared by 28.1% over the same period, while the Japanese TOPIX index has leapt by 32.5%. For me, this leaves many major stock markets looking overvalued, while UK shares languish in the bargain bin.
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Investing theory suggests that buying low-priced assets usually produces superior future returns to buying high-priced alternatives. So that’s why we keep buying and holding quality UK shares for the long run.
A FTSE hidden gem
For example, one stock I’ve kept a close eye on recently is ITV (LSE: ITV). Founded in 1955, ITV is the UK’s leading commercial terrestrial broadcaster. However, it also produces content for other media outlets across the globe and operates ITVX, a fast-growing streaming service.
ITV’s biggest problem is that advertisers are cutting back spending on linear TV. This decline has been driven by the weaker UK economy, falling consumer spending, and higher spending on online ads.
As a result, the broadcaster’s share price has taken a beating. At its 52-week high, it peaked at 89.88p on 9 March 2023, almost exactly a year ago. It then plunged to a 52-week low of 54.94p on 28 February, just one week ago.
At this point, I saw this stock as crazily undervalued, but didn’t have enough cash at hand to back my hunch. How I wish I had seized this chance.
As I write, the ITV share price has rebounded to 67.32p, valuing this business at £2.7bn. That’s a surge of almost a quarter (+22.5%) in the space of a week. Wow.
More gains to come?
Despite this sudden surge in its share price, ITV still looks undervalued to me. Its shares trade on a modest multiple of 9.9 times earnings, delivering an earnings yield of 10.1%.
What really draws me to this cheap stock is its market-thrashing dividend yield of 7.4% a year. That’s heading for double the FTSE 100’s yearly cash yield of around 4%. That said, this payout is covered by under 1.4 times earnings — a relatively slim safety margin.
Then again, ITV is cash-rich and has a rock-solid balance sheet, having just sold its share of the BritBox joint venture to co-partner the BBC for net proceeds of £235m in cash. Therefore, I foresee no cuts to our shareholder dividends in 2024/25.
In summary, while ITV stock was dirt-cheap a week ago, it still seems a bargain now, despite sharp hikes in the share price. Hence, we will hold on tightly to this FTSE 250 holding, collecting 7.4% a year in cash while hoping for more share-price recovery!
