Worries that advertising revenues might sink has smacked ITV’s (LSE: ITV) share price in 2022. By its very definition the FTSE 250 commercial broadcaster is reliant on strong ad sales to drive profits.
It’s a risk that I as an investor need to take seriously. Though recent trading news from advertising agency WPP today has gone some way to soothing my fears.
The FTSE 100 firm said that sales growth continued to accelerate from pre-pandemic levels between July and September. And encouragingly for ITV, the ad agency said UK like-for-like sales improved 4.2% year on year.
Hub talk
The question is whether ITV’s current share price fairly reflects the danger it faces. At 68p per share the company trades on a forward price-to-earnings (P/E) ratio of 5 times.
As a long-term investor I believe the company’s valuation reflects the above risk. Its better-than-expected first-half performance (when ad revenues rose 5%) has already given me reason to believe this.
In fact I think the broadcaster will experience strong share price growth over the next decade. Its ITV Hub streaming platform, for instance, is hugely popular and the company is investing heavily here to take the fight to paid-for services like Netflix.
The number of streams through ITV Hub jumped 8% between January and June to a whopping 814m. Advertising revenues via the platform are also soaring and digital ad sales jumped 20% in the first half.
Studio strength
I’d also buy the media giant for its winning ITV Studios production arm.
The division has a stellar track record of producing global hits like Downton Abbey, Love Island and The Chase. And it has a packed pipeline of potential money-spinning hits to keep revenues rising strongly (studio sales jumped 16% between January and June).
Furthermore, I like the steps ITV has taken to turn its production arm into a truly international heavyweight. ITV Studios has production bases in the US, Australia, Israel, and across Europe.
Its drive to create a diversified programming roster across genres and geographies is helping it to build a broad global audience, too.
A top dividend stock
As the title suggests, I think ITV will be a great way to build long-term passive income. It seems likely that investors won’t have to wait long for big dividends, either.
City brokers think the business will raise last year’s 3.3p per share dividend to 5p in 2022 and 2023. This creates an 7.4% dividend yield, more than double the 3.3% FTSE 250 average.
Based on predicted earnings there’s a great chance that ITV will meet these forecasts, too. Anticipated dividends are covered between 2.1 times and 2.7 times, above the minimum safety margin of 2 times.
ITV has the potential to deliver excellent shareholder returns over the next decade. With some cash to spare I’d happily but it for my portfolio right now.