ITV deals dividend blow

With an attractive dividend yield and low valuation, ITV shares have become compelling viewing for many investors, including fund manager Neil Woodford.

But whether the FTSE 100 stock deserves such acclaim still remains to be seen after the broadcaster dealt one or two blows to shareholders in annual results today.

Most notably, ITV's new boss Carolyn McCall pulled the plug on ITV's five-year record of paying a special dividend. Among her reasons for this, McCall pointed to the return of a "more normal" ordinary dividend after the total 2017 pay-out increased 8% to 7.8p.

But there were other areas for concern, including ITV's higher guidance on programme costs in 2018 and 2019 and a weaker advertising performance at the start of this year.

Shares fell 6% to leave ITV back near the four-year lows that prompted Woodford’s Income Focus fund to open a position in the company in October.

His team wrote at the time that ITV's valuation was looking increasingly attractive as the market focuses on the perceived structural threat posed by digital media and new entrants.

They said: "We are not complacent about the way that global advertising trends are evolving but, in our view, the risks are now more than adequately reflected in the share price."

Clearly, today's absence of a special dividend will have come as a surprise to Woodford as the note in October also highlighted ITV's "good track record of returning excess cash to shareholders through special dividends".

One of ITV's key strengths over many years has been its healthy cash flows, which is particularly important when there is wider political and economic uncertainty. This record has funded that attractive dividend yield, which today stood at 4.8%.

In 2017, ITV generated £763 million of operational cash from £842 million of adjusted EBITA, which equates to a profit to cash ratio of 91% after capex.

This compared with 97% in 2016, with profit to cash expected to be around 85% this year, reflecting investment in Studios working capital.

In the summer, McCall intends to update investors on where ITV needs to be in three and five years' time and how it should face the challenges of a changing media landscape where there is now much more content and more ways to watch it.

But rather than just highlighting the threats, McCall also pointed out today that Netflix and Amazon are also important buyers of ITV's content. In 2018 for example, Netflix will become the biggest customer of ITV's Global Entertainment distribution business.

She said: "Creating and owning quality content is a real advantage. The integrated producer broadcaster model is also a benefit - we have a great opportunity to make content famous on our channels in the UK before selling it round the world."

McCall plans to keep programme schedule costs above £1 billion in 2018, with an increase of around £30 million primarily due to the football World Cup. In the last financial year, the broadcaster made a year-on-year saving of £25 million.

2019 schedule costs are likely to be around £1.1 billion with higher sports costs and drama spend reflecting the drive towards creating, owning and distributing own content.

The World Cup should also help boost advertising revenues, although this benchmark struggled at the start of the year with declines of 2% and 3% in January and February respectively. March is expected to be up 7% due to the timing of Easter.

McCall said the company had made a "great start" to 2018, having also posted a strong performance last year in the face of challenging conditions.

Shares, however, have failed to respond. This is despite ongoing speculation that 9.9% shareholder Liberty Media will bid for ITV, although the US-based company insisted last year that it was not working any deal.