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At first glance, ITV (LSE:ITV) shares offer investors an attractive level of passive income. The dividend yield is 6%, almost double the FTSE 250 average of 3.1%.
What’s more, the valuation continues to look cheap, with a forward price-to-earnings ratio of 9.7.
So, should I add ITV to my dividend portfolio in July? Let’s find out.
A fuzzy picture just got clearer
The first thing that I find somewhat reassuring is that ITV’s dividend has remained at 5p since 2022. So there’s a consistency to the payout, albeit the lack of growth is disappointing.
But will it continue? Late last month, Reuters reported that Sky had agreed to buy ITV’s Media & Entertainment division for up to £1.6bn. This houses the broadcaster’s TV and streaming channels.
The long-awaited deal has been announced today (6 July) by ITV. After transaction and separation costs, net cash proceeds will be around £1.05bn, with completion expected in the second half of 2027.
ITV will then return £950m (or 25p per share) to shareholders and become a pureplay content creation company on the London Stock Exchange. It will be ITV Studios, which will also purchase Sky’s Love Productions, the maker of The Great British Bake Off, for £200m.
The company could get another £200m in cash if ITV’s total advertising revenue is more than £1.7bn for FY 2027.
Is ITV Studios an attractive proposition?
The stock only rose 1.5% on the news, taking the year-to-date return to just 2% or so. I assume regulators are going to look at this deal with a magnifying glass, so there’s a risk the details could change.
However, the idea of a standalone ITV Studios appeals to me a lot more than the existing group. Because barring big sporting events, not as many people watch live TV these days. Netflix, YouTube, and Amazon Prime are obviously much more popular.
But Studios already produces content for all the big global streamers, as well as ITV and BBC. It’s behind hit shows like Rivals S2 for Disney+, Come Dine With Me (Channel 4), Love Island, and I’m a Celebrity…Get Me Out of Here!
As part of the deal, Sky/ITV has committed to spend £2.1bn between 2028 and 2032 with ITV Studios. This content supply agreement is certainly reassuring, as it provides medium-term revenue visibility.
Here are some things to note about ITV Studios post-completion:
- Adjusted EBITA margins in the 13%–15% range.
- Strong cash generation.
- Surplus cash to be returned to shareholders.
- 1.5x net debt to EBITDA.
Where does this leave the dividend?
Until the deal is done, ITV will continue paying the dividend. But we don’t know what the stock will yield beyond that, other than that it will pay an “attractive dividend“, according to ITV.
Given this uncertainty, I’m not going to buy shares blindly for an unknown level of future income. But I could be interested in the Studios business once the dust settles.
In Q1, this unit delivered total revenue growth of 4%, with external revenue up 8%. It could be an interesting way to consider playing the rise of global streaming platforms, which are hungry for the sort of high-quality content that ITV Studios consistently delivers.
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Ben McPoland has no position in any of the companies mentioned.
This story originally appeared on Motley Fool
