ITV boosts pay out in lieu of strong growth

ITV Plc. shares traded atop the FTSE 100 today after the owner of the UK’s largest commercial free-to-air broadcaster garnished 2014 results with an unexpected cashback to shareholders.

ITV said it would return £250m to investors via a special dividend after 2014 profits came out better-than-expected, amid strong demand from advertisers in the first quarter.

The stock is again at all-time, post-Carlton Communications highs.

But whilst momentum suggests the shares could continue making fresh highs for the medium term, fundamentals look arguable.

 

 

 

Net ad revenue back in double digits

The maker of Downton Abbey has certainly had a promising start to 2015.

After rather modest single-digit percentage benchmark net advertising revenue (NAR) growth in the year before, ITV now forecasts these sales will be up 11% in the first quarter and up 4%-7% in April.

That compares to 6% in 2014.

Additionally, ITV made progress in its aim to reduce historical dependency on these revenues by developing production capabilities.

It said non-advertising revenue sources rose 10% to make up 45% of total revenue.

Full-year pre-tax profit was up 23% to £712m compared with a consensus forecast of £681m.

The full-year dividend rose 34%.

ITV CEO Adam Crozier has understandably been keen to keep pushing the diversification message, pointing to online and increasing returns from programme licensing.

“ITV delivered another strong performance in 2014 as we continue to rebalance the business, drive new revenue streams and invest in our future growth,” Crozier said ITV’s statement.

“Across ITV we maintained our emphasis on cash generation, cost control and improving margins as we continued to strengthen ITV creatively, commercially and financially.”

 

The Crozier Premium

There is an authority based on an unequivocal track record in those words.

ITV’s stock has put in a rise of more than 240% since the 51-year-old former Royal Mail boss took over as CEO in 2010.

Whilst some of that rise can be attributed to persistent talk of a bid, for at least a year, specifically naming the acquisitive Liberty Global, the owner of the UK-focused Virgin Media cable firm, there’s little question ITV is a stronger animal than when Crozier arrived.

Still, with the likelihood of such a takeover receding after heavily-indebted Liberty tacitly heeded warnings from credit agencies about downgrade risk, shareholders will probably scrutinise ITV’s growth prospects more closely.

 

 

Losing on viewing

An immediate pinch point should be ITV’s share of viewing.

Despite increasing strength of its on-demand, net-based businesses, the group’s share of viewing, still fell in 2014 after rising in 2013.

ITV said this was in large part due to a weaker performance from its main ITV1 channel.

Crozier told reporters today ITV’s linear broadcast television had held up well, but had struggled to keep up with the BBC, which he said had outspent its competitors.

Whilst ITV plans to increase its total network programme budget by around £20m to £1.040bn, to counter this trend, Crozier was in fact referring to ITV’s relatively thrifty expenditure on ‘in-house’ programme content, intended to compete with its closest rival, the BBC.

The BBC said its content investment was £176.4m in 2012/13, and rose to £200.6m in 2013/14, reaching a £200m target one year early.

ITV’s run rate of total expenditure on intangibles has been in single digits for all but one half-year since June 2010.

And whilst ITV Studios EBITA was up 22% to £162m in 2014 that did not prevent ITV’s Global Content/ITV Studios segment share of revenue contribution continuing to slide.

It fell to 36% of gross sales by the half-year mark in 2014 from 45% at the same point in the year before.

(ITV still lumps Internet revenues into a ‘Total Broadcast and Online’ segment which grew 7% to £127m during the full-year, whilst an ‘Online, Pay & Interactive’ line grew by 30% to £153m.)

 

 

Small screen growth rates

ITV’s valuation growth rate presents a similar deficit as its programme revenue growth rate.

It has persistently been below the average of a bunch of its European free-to-air peers, judging by Thomson Reuters data, since 2010, despite ITV’s resounding comeback from the penny stock status it hit at the end of the last decade.

 

 

Latterly, the group achieved a trailing average price-to-earnings ratio of 18.79 times, whilst ITV’s edged down from a high of 16.03 times in 2013, to 15.92 most recently.

The current FTSE 100 average is 20.4.

Even around 16 times earnings, there is a case for the stock to be seen as structurally overbought.

It is effectively at all-time post Carlton Communications/Granada highs, but yielded more in 2005, a year after it was formed, at 3.77%, than its 1.9% effective yield for 2014, excluding the pay-out announced today.

The market doesn’t expect ITV to match the current FTSE 100 average of 3.99% before 2015, and that hope still looks optimistic to me.

 

Still, the stock deservedly reflects a ‘Crozier Premium’ today, and short-term momentum is strong.

Even after that recedes, there looks to be plenty of support nearby, which could keep the shares above the shallower rising trend for the medium term.

But without opportunities for ITV to make bigger strides in growth than it achieved last year, its shares are unlikely to perform as robustly in 2015.