Today we have had a Q3 trading update from ITV the UK commercial broadcaster which may be worth watching as it has a Compound Income Score of 96 and features in the Scores Portfolio although, like the market it has not done much since in was purchased in April this year.
This appears to be an in line update as they are talking about 13% revenue growth which seems to be around what is expected in current forecasts. The chief executive, Adam Crozier said:
""We're on track for another year of double digit profit growth as we continue to strengthen ITV in the UK and internationally. Revenues were up 13% to £2,045m in the nine months with all parts of the business performing well."
So steady as she goes and barring any upsets in Q4 it looks as though they should be on track to met full year forecasts and Mr Crozier was also optimistic on the outlook suggesting the initial outlook for 2016 is encouraging. .This suggest that they could earn around 16p of earnings and pay a dividend of around 6p according to forecasts on DigitalLook & Morningstar which would represent growth in excess of 25% on the year. Strangely Stockopedia have a much higher figure of 6.81p so maybe that reflects a more complete set of brokers or perhaps some that are suggesting another special dividend this year perhaps?
Taking the 16p and 6p or so for now this leave the shares at this mornings price of around 260p on 16.25x with a 2.3% yield. These then fall to around 15x with a 3%+ yield depending on which forecasts you use. This seems like a fairish rating although it seems to be towards the lower / higher end of the PE and Yield ranges suggested by Stockopedia although I note they only give it a 30 for Value while it is about average on the CIS value measure at 59 which is based on the yield of 3.2% and an earnings yield of 6.5%. Aside from this the growth in the dividend and the high returns indicated by the operating margin and the ROCE are the main drivers of the high overall CIS score.
On the dividend growth it is worth noting that they describe their policy as progressive and they have been reducing cover in recent years. So unless they grow earning very rapidly in the future it seem unlikely that dividends will continue to grow at such a rapid pace in the medium term. My sustainable growth measure suggests something more like 12% but this may also be a bit high given it reflects the current very high ROCE of 46.8% which may also not be sustainable. The other effect of this historic dividend growth has been on the balance sheet. In the Interim earlier this year they said:
"Going forward our objective is to run an efficient balance sheet, and to balance investment for further growth with attractive returns to shareholders. Therefore we will, over time, look to increase our balance sheet leverage. We believe that maintaining leverage below 1.5x reported net debt to adjusted EBITDA will optimise our cost of capital, allow us to sustain our progressive dividend policy and enable us to retain flexibility to continue to invest for further growth.
Reflecting our confidence in the ongoing growth and cash generation of the business, last year the Board committed to growing the full year ordinary dividend by at least 20% per annum for three years to 2016, by when we will achieve a dividend cover of between 2.0 and 2.5 times adjusted earnings per share. In line with this policy, the Board has declared an interim dividend for 2015 of 1.9p, up 36%. The interim dividend is expected to be roughly a third of the full year dividend. "
On the balance sheet while they claimed the net debt to adjusted EBITDA was 0.6x on a rolling 12 month basis but they did go onto say:
"We also look at an adjusted measure of net debt, taking into consideration all of our financial commitments which reflects how credit rating agencies look at our balance sheet. At 30 June 2015, adjusted net debt was £1,447 million (31 December 2014: £1,078 million) reflecting an increase in expected contingent payments on acquisitions partly offset by a reduction in the pension deficit under IAS 19 and lower undiscounted finance lease commitments which mainly relate to broadcast transmission contracts and property. The ratio of adjusted net debt to adjusted EBITDA was 1.7x on a rolling 12 month basis."
So this seems to reinforce my view that the dividend growth is likely to slow given they seem to have reached their balance sheet leverage target and have since then agreed to buy the TV operations of UTV for £100m too.
Summary & Conclusion
An in line update from ITV and they seem on track to hit their forecasts for the year and having dived in a bit deeper to their dividend policy it seems to me there may be scope for analysts to upgrade their lower end dividend forecasts or for the Company to exceed these forecasts if they don't get upgraded in the meantime. The rating seems fair and the balance sheet has become more leveraged on the back of acquisitions and historically rapid dividend growth.
Going forward growth in the dividend seems likely to slow, but from their statements there may be one more year of 20%+ dividend growth to go. So worth watching I would say given the CIS score of 96 and the fact that the rating seems to be towards the lower end of its range.
On the technical front the shares have been a bit weak for the last 6 months or so, like the market, but has been in a steady up trend for the last 3 years. In the meantime it will be interesting to see if the previous 12 month and all time high around 280p acts as resistance or if the shares can break out in a bullish fashion as it did earlier this year.
Finally it is amusing to me to remember that ITV used to be one of just three, yes three channels which were broadcast on UK TV and this was in black and white until the 1970's and often shut down around midnight. While a thing called Teletext was about as close as we got to the internet at the time! Try telling that to today's youth with the hundreds of digital channels, internet streaming services and you tube videos and they wouldn't believe you. Reminds me of a little known song from an old rocker that some youngsters may not have heard of either, seems appropriate to today's post - check it out after the graph.