It is not hard to find doom-mongers when it comes to the British economy. But as an investor, I think that can offer me an opportunity.
Indeed, I have been adding one UK share to my portfolio repeatedly over the past year, despite it having its fair share of naysayers.
Household name
That UK share is broadcaster ITV (LSE: ITV). The company is a viewing staple across the land, thanks to its presence on television screens in millions of homes for decades.
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But as an investor, it is always important to remember that past performance is not necessarily a guide to future performance.
So why have I been adding to my holding?
Strong advertising demand
One of the risks at ITV that helps explain its lacklustre share price performance in recent years is its heavy reliance on the advertising market. If companies cut their marketing spend, the line of reasoning goes that it will lead to lower revenues and profits for broadcasters such as ITV.
There is some merit in this, in my view.
But I think this bearish analysis also misses some important points. Even if it falls, advertising spend will likely still be significant. Any downturn will probably be temporary. In the end, when the economy returns to strong growth and firms are flush with cash, I expect they will start spending more on advertising again.
I am a long-term investor. On that time horizon, I foresee strong advertising demand.
Studios business
Not only that, but ITV is more than just a one-trick pony.
As well as being a broadcaster, it has built an infrastructure that feeds other broadcasters. From studio space to production help, the business offers a range of services that can enable companies such as Netflix bring their projects to market.
I see that as an attractive business in itself. If it was not part of ITV, I think investors would value this Studio arm more highly. Being bundled within the legacy TV broadcaster however, I do not think this business attracts the valuation it ought to.
Attractive valuation
But despite what I see as its attractive characteristics, ITV is still an unloved UK share.
It trades on a price-to-earnings ratio in the single digits and has a dividend yield of over 6%. That seems like an attractive valuation to me.
That raises a question. If this UK share is as attractive as I think, why is it so cheap?
The growth of digital competitors means terrestrial TV is past its heyday. That threatens to hurt revenues and profits at ITV.
I do see that as a risk. But the business has been actively developing its digital footprint and, so far, that seems to be yielding strong results.
Meanwhile, I think ITV’s Studio business could actually benefit, not suffer, from the proliferation of digital channels. Many want to offer original content but may lack the facilities to produce it in-house
I see ITV as a growth stock, but its share price makes it look like a value stock. So I have been buying. If I have spare cash in coming weeks, I plan to buy more ITV shares for my portfolio.
