FTSE 250 broadcaster ITV (LSE: ITV) has fallen 15% from its 22 July one-year traded high of 88p.
As a share’s yield moves in the opposite direction to its share price, this has pushed up its annual return to 6.7%. By contrast, the average FTSE 250 yield is just 3.3% and the FTSE 100’s is 3.5%.
It is also very close to the 7% minimum I look for in shares selected for my passive income portfolio.
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This is designed to generate a high yearly passive income so I can keep reducing my working commitments. Passive income is money made with minimal effort, most notably, in my view, from dividends paid by holding shares.
How much passive income might it generate?
Investors taking a £10,000 stake in ITV should make £670 in first-year dividends. On the same 6.7% average yield this would increase to £6,700 over 10 years and after 30 years to £20,100.
However, these payouts could be even greater if the standard investment process of dividend compounding were used. This involves buying more of a stock with the dividends it pays.
By doing this on the same 6.7% average yield (which is not guaranteed, of course), the dividends would be £9,506, not £6,700. And on the same basis, it would rise to £64,217 after 30 years, rather than £20,100.
Including the initial £10,000 investment, the total value of the ITV holding would be £74,217. This would be paying £4,973 every year in passive income by that point!
An additional share price bonus?
I only ever buy stocks that look undervalued to me. These are less likely to lose significant value over time than overvalued shares, in my experience. Conversely, such a stock is more likely to gain in price over the long term.
The first part of my assessment process for any share is to compared its key valuations with its competitors.
ITV currently trades at a price-to-earnings ratio of 6.6 against a peer average of 9.5, so it looks undervalued here. These competitors comprise Atresmedia Corporación de Medios de Comunicación at 5.8, Métropole Télévision at 9.2, MFE-Mediaforeurope at 10.8, and RTL Group at 12.1.
ITV also looks undervalued on its price-to-sales ratio of 0.8 compared to its competitors’ average of 1.
The second part of my stock price evaluation is to look at what a fair value is based on future cash flow forecasts. Using other analysts’ figures and my own, the resultant discounted cash flow analysis shows ITV is 66% undervalued at 75p.
So the fair value for the shares is technically £2.21, although market vagaries might push them lower or higher.
Will I buy the stock?
A risk to the share is the intense competition in the sector that may squeeze its earnings. It is these that ultimately power a firm’s share price and dividend.
This is even more relevant for stocks priced under £1, as each penny represents a disproportionately large amount of its total value.
This is too much pricing volatility risk for me to take at my point in the investment cycle, aged over 50 as I am.
If I were younger, I would probably buy the stock for its high yield and share price potential and I do think it is worth investors with a longer timeframe considering.
